Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **x**                                                                                                                                                                                                                | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                           | ** **                                                                                              |
| **For the quarterly period ended September 30,  2009**                                                                                                                                                          |
| ** **                                                                                                                                                                                                           | ** **                                                                                              |
| **OR**                                                                                                                                                                                                               |
| ** **                                                                                                                                                                                                           | ** **                                                                                              |
| **o**                                                                                                                                                                                                                | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                           | ** **                                                                                              |
| **For the transition period from  to                             ** |

 

**COMMISSION FILE NUMBER 000-29661**

 

**UTSTARCOM, INC.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                             | ** ** | **52-1782500**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **1275 HARBOR BAY PARKWAY**              | ** ** | ** **                           |
| **ALAMEDA, CALIFORNIA**                  | ** ** | **94502**                            |
| (Address of principal executive offices) |       | (zip code)                           |

 

Registrant’s telephone number, including areacode: **(510) 864-8800**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one):

 
| Large accelerated filer x                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o No x

 

As of November 4,2009 there were 129,418,352 shares of the registrant’s common stockoutstanding, par value $0.00125.

 

 

 

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**TABLEOF CONTENTS**

 
| PART I—FINANCIAL  INFORMATION                                                                  | 3  |
|----------------------------------------------------------------------------------------------------------|----|
| ITEM 1—CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                     | 3  |
| ITEM  2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS | 25 |
| ITEM  3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                                 | 43 |
| ITEM 4—CONTROLS AND  PROCEDURES                                                                     | 44 |
| PART II—OTHER  INFORMATION                                                                     | 46 |
| ITEM  1—LEGAL PROCEEDINGS                                                                           | 46 |
| ITEM  1A—RISK FACTORS                                                                               | 46 |
| ITEM  2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                 | 46 |
| ITEM  3—DEFAULTS UPON SENIOR SECURITIES                                                             | 47 |
| ITEM  4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         | 47 |
| ITEM  5—OTHER INFORMATION                                                                           | 47 |
| ITEM  6—EXHIBITS                                                                                    | 47 |
| SIGNATURES                                                                                               | 48 |

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)**

 
| ** **                                                                                                                                                                            | ** ** | **September 30,**               | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2009**                             | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                            | ** ** | **(In thousands, except par value)** | ** ** |
| **ASSETS**                                                                                                                                                                            |       |                                 |       |                  |       |
| Current assets:                                                                                                                                                                       |       |                                 |       |                  |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                                    | 237,112    |                  | $          | 309,603 |   |
| Short-term investments                                                                                                                                                                |       | 4,544                                |       | 4,262                 |       |
| Accounts receivable, net of  allowances for doubtful accounts of $28,545 and $37,359, respectively                                                                                    |       | 49,242                               |       | 149,210               |       |
| Accounts receivable, related  parties                                                                                                                                                 |       | 4,472                                |       | 9,166                 |       |
| Notes receivable                                                                                                                                                                      |       | 1,142                                |       | 11,120                |       |
| Inventories                                                                                                                                                                           |       | 167,452                              |       | 189,832               |       |
| Deferred costs                                                                                                                                                                        |       | 114,864                              |       | 114,884               |       |
| Prepaids and other current assets                                                                                                                                                     |       | 59,918                               |       | 127,675               |       |
| Short-term restricted cash                                                                                                                                                            |       | 24,445                               |       | 16,840                |       |
| Total current assets                                                                                                                                                                  |       | 663,191                              |       | 932,592               |       |
| Property, plant and equipment, net                                                                                                                                                    |       | 166,640                              |       | 175,287               |       |
| Long-term investments                                                                                                                                                                 |       | 8,402                                |       | 17,691                |       |
| Long-term deferred costs                                                                                                                                                              |       | 134,013                              |       | 149,258               |       |
| Long-term deferred tax assets                                                                                                                                                         |       | 10,797                               |       | 13,464                |       |
| Other long-term assets                                                                                                                                                                |       | 21,035                               |       | 22,514                |       |
| Total assets                                                                                                                                                                          |       | $                                    | 1,004,078  |                  | $          | 1,310,806 |   |
| **LIABILITIES AND EQUITY**                                                                                                                                                            |       |                                 |       |                  |       |
| Current liabilities:                                                                                                                                                                  |       |                                 |       |                  |       |
| Accounts payable                                                                                                                                                                      |       | $                                    | 45,331     |                  | $          | 176,384 |   |
| Income taxes payable                                                                                                                                                                  |       | 2,398                                |       | 7,162                 |       |
| Customer advances                                                                                                                                                                     |       | 187,906                              |       | 144,700               |       |
| Deferred revenue                                                                                                                                                                      |       | 111,075                              |       | 117,584               |       |
| Deferred tax liabilities                                                                                                                                                              |       | 11,644                               |       | 11,644                |       |
| Other current liabilities                                                                                                                                                             |       | 147,626                              |       | 163,046               |       |
| Total current liabilities                                                                                                                                                             |       | 505,980                              |       | 620,520               |       |
| Long-term deferred revenue                                                                                                                                                            |       | 182,607                              |       | 210,050               |       |
| Other long-term liabilities                                                                                                                                                           |       | 18,435                               |       | 12,594                |       |
| Total liabilities                                                                                                                                                                     |       | 707,022                              |       | 843,164               |       |
| Commitments and contingencies  (Note 10)                                                                                                                                         |       |                                 |       |                  |       |
| UTStarcom, Inc. stockholders’  equity:                                                                                                                                      |       |                                 |       |                  |       |
| Common stock: $0.00125 par value;  750,000 authorized shares; 129,217 and 126,566 shares issued and outstanding  at September 30, 2009 and  December 31, 2008, respectively |       | 152                                  |       | 152                   |       |
| Additional paid-in capital                                                                                                                                                            |       | 1,248,872                            |       | 1,239,074             |       |
| Accumulated deficit                                                                                                                                                                   |       | (1,027,782                           | )          | (841,486              | )          |
| Accumulated other comprehensive  income                                                                                                                                               |       | 75,038                               |       | 69,094                |       |
| Total UTStarcom, Inc.  stockholders’ equity                                                                                                                                 |       | 296,280                              |       | 466,834               |       |
| Noncontrolling interests                                                                                                                                                              |       | 776                                  |       | 808                   |       |
| Total equity                                                                                                                                                                          |       | 297,056                              |       | 467,642               |       |
| Total liabilities and equity                                                                                                                                                          |       | $                                    | 1,004,078  |                  | $          | 1,310,806 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

 
| ** **                                                                 | ** ** | **Three months ended September  30,**     | ** ** | **Nine months ended September  30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                  | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                 | ** ** | **(in thousands, except per share data)** | ** ** |
| Net  sales                                                                 |       |                                      |       |                                 |       |   |   |   |   |
| Third  party                                                               |       | $                                         | 65,672     |                                 | $          | 170,878 |   | $ | 253,977 |   | $ | 1,368,461 |   |
| Related  party                                                             |       | 4,832                                     |       | 9,729                                |       | 16,030 |   | 30,891 |   |
|                                                                       |       | 70,504                                    |       | 180,607                              |       | 270,007 |   | 1,399,352 |   |
| Cost  of net sales                                                         |       |                                      |       |                                 |       |   |   |   |   |
| Third  party                                                               |       | 43,763                                    |       | 117,601                              |       | 230,694 |   | 1,149,277 |   |
| Related  party                                                             |       | 2,552                                     |       | 5,679                                |       | 9,310 |   | 18,721 |   |
| Gross  profit                                                              |       | 24,189                                    |       | 57,327                               |       | 30,003 |   | 231,354 |   |
|                                                                       |       |                                      |       |                                 |       |   |   |   |   |
| Operating  expenses:                                                       |       |                                      |       |                                 |       |   |   |   |   |
| Selling,  general and administrative                                       |       | 33,139                                    |       | 59,445                               |       | 114,290 |   | 211,199 |   |
| Research  and development                                                  |       | 14,246                                    |       | 35,971                               |       | 51,983 |   | 116,657 |   |
| Amortization  of intangible assets                                         |       | —                                    |       | 279                                  |       | — |   | 3,833 |   |
| Restructuring                                                              |       | 8,909                                     |       | —                               |       | 41,485 |   | — |   |
| Loss  (gain) on divestiture                                                |       | 1,689                                     |       | (3,455                               | )          | 332 |   | (3,455 | ) |
| Total  net operating expenses                                              |       | 57,983                                    |       | 92,240                               |       | 208,090 |   | 328,234 |   |
|                                                                       |       |                                      |       |                                 |       |   |   |   |   |
| Operating  loss                                                            |       | (33,794                                   | )          | (34,913                              | )          | (178,087 | ) | (96,880 | ) |
|                                                                       |       |                                      |       |                                 |       |   |   |   |   |
| Interest  income                                                           |       | 462                                       |       | 2,143                                |       | 1,810 |   | 6,250 |   |
| Interest  expense                                                          |       | (24                                       | )          | (446                                 | )          | (544 | ) | (9,974 | ) |
| Other  income (expense), net                                               |       | (1,556                                    | )          | (14,943                              | )          | (3,341 | ) | 38,107 |   |
|                                                                       |       |                                      |       |                                 |       |   |   |   |   |
| Loss  before income taxes                                                  |       | (34,912                                   | )          | (48,159                              | )          | (180,162 | ) | (62,497 | ) |
| Income  tax benefit (expense)                                              |       | 317                                       |       | (7,791                               | )          | (6,166 | ) | (7,396 | ) |
| Net  loss                                                                  |       | (34,595                                   | )          | (55,950                              | )          | (186,328 | ) | (69,893 | ) |
| Net  loss attributable to noncontolling interests                          |       | 15                                        |       | 6                                    |       | 32 |   | 526 |   |
| Net  loss attributable to UTStarcom, Inc.                                  |       | $                                         | (34,580    | )                                    | $          | (55,944 | ) | $ | (186,296 | ) | $ | (69,367 | ) |
|                                                                       |       |                                      |       |                                 |       |   |   |   |   |
| Net  loss per share attributable to UTStarcom, Inc.- Basic and Diluted     |       | $                                         | (0.27      | )                                    | $          | (0.45 | ) | $ | (1.47 | ) | $ | (0.56 | ) |
|                                                                       |       |                                      |       |                                 |       |   |   |   |   |
| Weighted  average shares used in per-share calculation - Basic and Diluted |       | 127,875                                   |       | 123,884                              |       | 126,930 |   | 123,036 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**

 
| ** **                                                                                                           | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                                                                                           | ** ** | **(In thousands)**                        | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                |       |                                      |       |   |   |
| Net loss                                                                                                             |       | $                                         | (186,328   | ) | $ | (69,893 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities:                                         |       |                                      |       |   |   |
| Depreciation and amortization                                                                                        |       | 10,177                                    |       | 30,603 |   |
| Loss (gain) on divestiture, sale of investments and  liquidation of ownership interest in a variable interest entity |       | 332                                       |       | (51,830 | ) |
| Other-than-temporary impairment of equity investment                                                                 |       | 5,517                                     |       | 4,308 |   |
| Stock-based compensation expense                                                                                     |       | 9,434                                     |       | 13,930 |   |
| (Recovery of) provision for doubtful accounts                                                                        |       | (3,659                                    | )          | 220 |   |
| Deferred income taxes                                                                                                |       | 2,341                                     |       | (7,921 | ) |
| Other                                                                                                                |       | (634                                      | )          | (27 | ) |
| Changes in operating assets and liabilities:                                                                         |       |                                      |       |   |   |
| Accounts receivable                                                                                                  |       | 108,947                                   |       | 60,894 |   |
| Inventories and deferred costs                                                                                       |       | 40,512                                    |       | (13,046 | ) |
| Other assets                                                                                                         |       | 62,380                                    |       | (5,729 | ) |
| Accounts payable                                                                                                     |       | (132,005                                  | )          | 80,316 |   |
| Income taxes payable                                                                                                 |       | 2,200                                     |       | 8,476 |   |
| Customer advances                                                                                                    |       | 41,116                                    |       | (34,219 | ) |
| Deferred revenue                                                                                                     |       | (33,775                                   | )          | (5,088 | ) |
| Other liabilities                                                                                                    |       | (15,757                                   | )          | (42,866 | ) |
| Net cash used in operating activities                                                                                |       | (89,202                                   | )          | (31,872 | ) |
|                                                                                                                 |       |                                      |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                |       |                                      |       |   |   |
| Additions to property, plant and equipment                                                                           |       | (1,651                                    | )          | (12,671 | ) |
| Proceeds from the disposition of (purchase of) an  investment interest                                               |       | 1,600                                     |       | (3,841 | ) |
| Proceeds from repayment of loan by a variable interest  entity                                                       |       | —                                    |       | 7,728 |   |
| Net proceeds from divestitures                                                                                       |       | 11,508                                    |       | 207,097 |   |
| Change in restricted cash                                                                                            |       | 1,895                                     |       | (10,380 | ) |
| Purchase of short-term investments                                                                                   |       | (6,514                                    | )          | (9,778 | ) |
| Proceeds from sale of short-term investments                                                                         |       | 7,625                                     |       | 67,284 |   |
| Other                                                                                                                |       | 437                                       |       | 245 |   |
| Net cash provided by investing activities                                                                            |       | 14,900                                    |       | 245,684 |   |
|                                                                                                                 |       |                                      |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                |       |                                      |       |   |   |
| Issuance of stock, net of expenses                                                                                   |       | 367                                       |       | 1,150 |   |
| Proceeds from borrowings                                                                                             |       | —                                    |       | 50,000 |   |
| Payments on borrowings                                                                                               |       | —                                    |       | (375,317 | ) |
| Other                                                                                                                |       | (755                                      | )          | (9,057 | ) |
| Net cash used in financing activities                                                                                |       | (388                                      | )          | (333,224 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                                                        |       | 2,199                                     |       | 10,932 |   |
| Net decrease in cash and cash equivalents                                                                            |       | (72,491                                   | )          | (108,480 | ) |
| Cash and cash equivalents at beginning of period                                                                     |       | 309,603                                   |       | 437,449 |   |
| Cash and cash equivalents at end of period                                                                           |       | $                                         | 237,112    |   | $ | 328,969 |   |
|                                                                                                                 |       |                                      |       |   |   |
| Supplemental disclosure of cash flow information:                                                                    |       |                                      |       |   |   |
| Non-cash operating activity:                                                                                         |       |                                      |       |   |   |
| Accounts receivable transferred to notes receivable                                                                  |       | $                                         | 2,467      |   | $ | 18,487 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**UTSTARCOM, INC.**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 1 -BASIS OF PRESENTATION AND LIQUIDITY**

 

The accompanyingunaudited condensed consolidated financial statements include the accounts ofUTStarcom, Inc. (“Company”) and its wholly and majority ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in the preparation of the condensed consolidated financialstatements. The noncontrolling interests in consolidated subsidiaries are shownseparately in the condensed consolidated financial statements. Certainreclassifications have been made to prior period amounts to conform to currentperiod presentation.  Suchreclassifications have no effect on net income as previously reported. TheCompany has evaluated subsequent events through November 9, 2009, which isthe date the financial statements were issued.

 

The accompanyingunaudited condensed consolidated financial statements have been prepared by theCompany pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles in the United States (“GAAP”) have beencondensed or omitted pursuant to such rules and regulations. Thesecondensed consolidated financial statements should be read in conjunction withthe Company’s December 31, 2008 financial statements, including the notesthereto, and the other information set forth in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the amounts of assets, liabilities, revenue, costs,expenses and gains and losses not affecting retained earnings that are reportedin the consolidated financial statements and accompanying disclosures.  Actual results may be different.  See the Company’s 2008 Annual Report fordiscussion of the Company’s critical accounting policies and estimates.

 

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments (consisting of only normal recurringadjustments) considered necessary for a fair statement of the Company’sfinancial condition, the results of its operations and its cash flows for theperiods indicated. The results of operations for the three and nine monthsended September 30, 2009 are not necessarily indicative of the operatingresults for the full year.

 

The accompanying condensed consolidated financialstatements are presented on the basis that the Company is a going concern. Thegoing concern assumption contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business.

 

The Company incurred net losses of$150.3 million, $195.6 million and $117.3 million during theyears ended December 31, 2008, 2007 and 2006, respectively. During thenine months ended September 30, 2009, the Company recorded a net loss of$186.3 million. The Company recorded operating losses in 18 of the19 consecutive quarters in the period ended September 30, 2009. At September 30,2009, the Company had an accumulated deficit of $1,027.8 million. The Companyincurred net cash outflows from operations of $55.2 million and$225.1 million in 2008 and 2007 respectively. Cash used in operations was$89.2 million during the nine months ended September 30, 2009.  At September 30, 2009, the Company hadcash and cash equivalents of $237.1 million in the aggregate to meet theCompany’s liquidity requirements of which $91.3 million was held by itssubsidiaries in China. China imposes currency exchange controls on certaintransfers of funds from/to China.  Goingforward, the amount of cash available for transfer from the China subsidiariesfor use by the Company’s non-China subsidiaries is limited both by theliquidity needs of the subsidiaries in China and the restriction on currencyexchange by Chinese-government mandated limitations including currency exchangecontrols on certain transfers of funds outside of China. Managementexpects the Company to continue to incur losses and negative cash flows fromoperations over at least the remainder of 2009.

 

The Company’s only committed source for borrowingsis a credit facility in China. Each borrowing under this facility is subject tothe bank’s then current favorable opinion of the credit worthiness of theCompany’s China subsidiaries, the bank having funds available for lending, andother Chinese banking regulations and practices. As a result, management cannotbe certain that borrowings under this facility will be adequate, if availableat all, to meet the Company’s liquidity requirements. During the third quarterof 2009, a $263.5 million credit facility expired and was not renewed. Theremaining approximately $58.6 million credit facility expires in the fourthquarter of 2009. Management is not certain that new credit facilities will beavailable on commercially reasonable terms or at all. Even if these facilitiesare renewed, based on the Company’s recent financial performance, the totalavailable credit may be reduced. Accordingly, management is not certain thatborrowings under the Company’s credit facility in China will be adequate tomeet the Company’s financing requirements.

 

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In 2009 and 2008, the Company took a number ofactions to improve its liquidity, including divesting the Company’s non-corebusinesses. In December 2008, management announced initiatives includingefforts to eliminate functional duplications by consolidation of a number offunctions into the Company’s China operations. In June 2009, management expanded the initiativesto include a worldwide reduction in workforce, outsourcing of manufacturingoperations and optimizing research and development spending with a focus onselected products. The Company’s year-to-year quarterly selling, general and administrative and researchand development operating expenses decreased significantly in the first ninemonths of 2009 compared with the comparable period of 2008 and managementbelieves the continuing efforts to stream-line operations will enable the Company’sfixed cost base to be better aligned with operations, market demand andprojected sales levels. If projected sales do not materialize, the Company willneed to take further actions to reduce costs and expenses or explore other costreduction options.

 

Management believes that if the Company is able toachieve projected cash collections from customers and contain expenses and cashused in operations, both the Company’s China and non-China operations will havesufficient liquidity to finance working capital and capital expenditure needsduring the next 12 months. If the Company is not able to execute its plansuccessfully, the Company may need to obtain funds from equity or debtfinancings. There can be no assurance that additional financing, if required,will be available on terms satisfactory to the Company or at all, and if fundsare raised in the future through issuance of preferred stock or debt, thesesecurities could have rights, privileges or preference senior to those of theCompany’s common stock and newly issued debt could contain debt covenants thatimpose restrictions on the Company’s operations. Further, any sale of newlyissued debt or equity securities could result in additional dilution to theCompany’s current shareholders.

 

Global economies have experienced a significantdownturn driven by a financial and credit crisis that will continue tochallenge such economies for some period of time. Under the currentmacroeconomic environment, there are significant risks and uncertaintiesinherent in management’s ability to forecast future results. The operatingenvironment confronting the Company, both internally and externally, raisessignificant uncertainties. While improvements in the Company’s operatingresults, cash flows and liquidity are anticipated as management’s initiativesto control and reduce costs while maintaining and growing the Company’s revenuebase are fully implemented, the Company’s recurring losses and expectednegative cash flows from operations raise substantial doubt about the Company’sability to continue as a going concern. The condensed consolidated financialstatements do not include any adjustments relating to the recoverability andclassification of recorded assets amounts or the amounts and classification ofliabilities or any other adjustments that may be necessary if the entity isunable to continue as a going concern.

 

**NOTE****2 -RECENT ACCOUNTING PRONOUNCEMENTS**

 

***During the first nine months offiscal year 2009, the Company adopted the following accounting standards:***

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued the*FASB Accounting Standards Codification*(the “Codification”), the authoritative guidance for GAAP. The Codification,which changes the referencing of financial standards, became effective forinterim and annual periods ending on or after September 15, 2009. TheCodification is now the single official source of authoritative U.S. GAAP(other than guidance issued by the SEC), superseding existing FASB, AmericanInstitute of Certified Public Accountants, Emerging Issues Task Force (“EITF”),and related literature. Only one level of authoritative U.S. GAAP now exists.All other literature is considered non-authoritative. The Codification does notchange U.S. GAAP. We adopted the Codification during the third quarter of2009. The adoption of the Codification did not have any substantive impact onthe Company’s consolidated financial statements.

 

In May 2009, theFASB issued authoritative guidance for subsequent events, which establishes theaccounting for and disclosure of events that occur after the balance sheetdate, but before the financial statements are issued or are available to beissued. The guidance sets forth the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements. The guidance also identifies the disclosures that anentity should make about events or transactions that occurred after the balancesheet date. Effective April 1, 2009, the Company adopted the guidance. The adoptiondid not have a material impact on the Company’s consolidated financialstatements.  See Note 1 for theadditional disclosures required by this guidance.

 

***Recent Accounting Pronouncements Not Yet Adopted***

 

In June 2009, the FASB issued authoritative guidance requiring anenterprise to perform an analysis to determine whether the enterprise’s variableinterest or interests give it a controlling financial interest in a variableinterest entity. This analysis identifies the primary beneficiary of a variableinterest entity as one with the power to direct the activities of a variableinterest entity that most significantly impact the entity’s economicperformance and the obligation to absorb losses of the entity that couldpotentially be significant to the variable interest. The guidance will beeffective as of the beginning of the annual reporting period commencing after November 15,2009 and will be adopted by the Company in the first quarter of fiscal year2010. The Company is assessing the potential impact, if any, of the adoption ofthe guidance on its consolidated results of operations and financial condition.

 

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In September 2009,the FASB issued new standards for revenue recognition with multiple deliverables.These new standards impact the determination of when the individualdeliverables included in a multiple-element arrangement may be treated asseparate units of accounting. Additionally, these new standards modify themanner in which the transaction consideration is allocated across theseparately identified deliverables by no longer permitting the residual methodof allocating arrangement consideration. These new standards are effective forthe Company beginning in the first quarter of fiscal year 2011, however earlyadoption is permitted. The Company is currently assessing the potential impact,if any, of the guidance on its consolidated financial statements.

 

In September 2009,the FASB issued new standards for the accounting for certain revenue arrangementsthat include software elements. These new standards amend the scope ofpre-existing software revenue guidance by removing from the guidancenon-software components of tangible products and certain software components oftangible products. These new standards are effective for the Company beginningin the first quarter of fiscal year 2011, however early adoption is permitted.The Company is currently assessing the potential impact, if any, of theguidance on its consolidated financial statements.

 

**NOTE 3—DIVESTITURES**

 

*Korea operations*

 

On July 31, 2009, theCompany completed a sale of its Korea operations to an entity founded by aformer employee and received total consideration of approximately $2.0 million.In connection withthis transaction, the Company recorded a net loss of $1.7 million during thethird quarter of 2009.  Included in thisamount was $2.6 million of foreign currency losses previously carried inaccumulated other comprehensive income that were realized upon completion ofsale and liquidation of the subsidiary. The Company determined thatthe divestiture of Korea operations did not meet the criteria for presentationas a discontinued operation due to the continuing direct cash flows of theremaining Handset segment operations.

 

*UTStarcom Personal Communications LLC (PCD)*

 

On July 1, 2008, the Company completed the saleof UTStarcom Personal Communications LLC, a wholly-owned subsidiary of theCompany (“PCD”), to Personal Communications Devices, LLC (“PCD LLC”).The Company also invested $1.6 million in equity securities representingapproximately a 2.6% interest in PCD LLC. The Company recorded a$3.8 million gain on sale of PCD net assets during 2008. In the secondquarter of 2009, the Company recorded an additional $1.4 million gain resultingfrom an adjustment to reflect actual transaction-related costs. The total gainon sale of PCD net assets includes proceeds of $10.0 million held in escrowwhich were disbursed to the Company in July 2009. Pursuant to the originalterms of the divestiture agreement, the Company was potentially entitled toreceive up to a $50 million earnout payment in 2011 based on theachievement of cumulative earnings levels of PCD LLC through December 31,2010.

 

Prior to June 30,2008, PCD was a reportable segment of the Company. Concurrent with theclosing of the divestiture transaction, the Company entered into a three-yearsupply agreement with PCD LLC whereby the Company indicated its intent tosupply handset products to PCD LLC. In connection with the wind-down ofour Korea operations, in December 2008, we furnished PCD LLC with 180-day’snotice of termination of the supply agreement. Due to the continuing directcash flows pursuant to the supply agreement beyond the one-year assessmentperiod starting from the date of sale, the sale of the PCD assets did not meetthe criteria for presentation as a discontinued operation.

 

OnJune 30, 2009, the Company entered into a Settlement Agreement and Release(the “Settlement Agreement”) with PCD LLC. Under the Settlement Agreement, the Companywaived its right to any earnout payments and granted a call option to PCD LLCfor the Company’s $1.6 million investment in the equity securities of PCD LLC.The Company also agreed to pay PCD LLC a total of $11.1 million which was recordedas warranty costs of approximately $8.4 million (see Note 8) and a reduction ofrevenue of approximately $2.7 million. In the third quarter of2009, PCD LLC elected to exercise the call option to repurchase all 2,199,214 Class AUnits owned by the Company.  The Company received cash of $1.6 million in September 2009and transferred all equity holdings in Class A Units to PCD LLC. Nogain or loss was recorded on this transfer as the carrying value of the equityholdings was equal to the proceeds received. In addition to the $11.1 millionclaim settlement, in the second quarter of 2009, the Company recorded anadditional $17.6million of costs for inventory write-downs to net realizable value, write-downsof excess inventory and warranty reserves related to transactions with PCD LLC.The Company recorded these transactions in the second quarter of 2009,resulting in a decrease in revenue of approximately $2.7 million and anincrease in cost of net sales of $26.0 million.

 

*Sale of Assets to Marvell Technology Group Ltd:*

 

In February 2006, the Company soldsubstantially all of the assets and selected liabilities of its semiconductordesign business division to Marvell Technology Group Ltd. (“Marvell”). Inconnection with the sale of assets, the Company entered into a supply agreementwith Marvell to purchase chipsets for the Company’s handset products over thenext five years. The value allocated to the supply agreement of$20.2 million has been amortized in proportion to the quantities ofchipsets purchased under the supply agreement. During the first quarter of2009, the Company revised its estimates of customer demand for certain handsetproducts and determined that future chipset purchases from Marvell would benegligible. As a result, the Company fully amortized the remaining value of thesupply agreement of $8.5 million in the first quarter of 2009. For the ninemonths ended September 30, 2009 and 2008, approximately $8.5 millionand $5.1 million, respectively, have been amortized against costof sales.

 

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**NOTE****4 - EARNINGS (LOSS) PERSHARE**

 

Basic earnings per share (“EPS”) is computed bydividing net income (loss) available to common stockholders by the weightedaverage number of shares of the Company’s common stock outstanding during theperiod, which excludes nonvested restricted stock. Diluted EPS presents theamount of net income (loss) available to each share of common stock outstandingduring the period plus each share of common stock that would have beenoutstanding assuming the Company had issued shares of common stock for alldilutive potential common shares outstanding during the period. The Company’spotentially dilutive common shares include outstanding stock options, nonvestedrestricted stock and restricted stock units, convertible subordinated notesprior to their maturity on March 1, 2008, and Employee Stock Purchase Plan(“ESPP”) shares prior to termination of the ESPP effective May 15, 2009.

 

The following is asummary of the calculation of basic and diluted EPS:

 
| ** **                                                                   | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | **(in thousands  except per share data)**  | ** ** |
| **Numerator:**                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Net loss attributable to UTStarcom, Inc.                                |       | $                                          | (34,580    | )                                         | $          | (55,944 | ) | $ | (186,296 | ) | $ | (69,367 | ) |
|                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| **Denominator:**                                                             |       |                                       |       |                                      |       |   |   |   |   |
| Weighted-average shares outstanding                                          |       | 127,875                                    |       | 123,884                                   |       | 126,930 |   | 123,036 |   |
|                                                                         |       |                                       |       |                                      |       |   |   |   |   |
| Net loss per share attributable to UTStarcom, Inc. -  basic and diluted |       | $                                          | (0.27      | )                                         | $          | (0.45 | ) | $ | (1.47 | ) | $ | (0.56 | ) |

 

For the three and ninemonths ended September 30, 2009 and 2008, no potential common shares weredilutive because of the net loss in each of these periods. The following tablesummarizes the total potential shares of common stock that were excluded fromthe diluted per share calculation:

 
| ** **                                            | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                         | ** ** |
| Weighted average stock options and awards outstanding |       | 11,353                                     |       | 23,091                                    |       | 13,201 |   | 24,608 |   |
| Conversion of convertible subordinated notes          |       | —                                     |       | —                                    |       | — |   | 2,528 |   |
| Other                                                 |       | —                                     |       | 1,751                                     |       | 145 |   | 1,007 |   |
|                                                  |       | 11,353                                     |       | 24,842                                    |       | 13,346 |   | 28,143 |   |

 

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**NOTE 5 -COMPREHENSIVE LOSS**

 

Total comprehensive lossfor the three and nine months ended September 30, 2009 and 2008 consistedof the following:

 
| ** **                                                                                                          | ** ** | **Three months ended September  30,** | ** ** | **Nine months ended September  30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                                          | ** ** | **(in thousands)**                    | ** ** |
| ** **                                                                                                          | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  loss                                                                                                           |       | $                                     | (34,595    | )                                    | $          | (55,950 | ) | $ | (186,328 | ) | $ | (69,893 | ) |
| Other  Comprehensive income                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Unrealized  gain (loss) on investments, net of tax                                                                  |       | 714                                   |       | (30                                  | )          | 714 |   | (1,753 | ) |
| Reclassification  for realization of previously unrealized (gains) losses, net of tax                               |       | —                                |       | 25                                   |       | 3,313 |   | (36,899 | ) |
| Reclassification  for realization of previously unrealized foreign currency translation (gains)  losses, net of tax |       | 2,360                                 |       | (1,540                               | )          | 2,164 |   | (2,918 | ) |
| Foreign  currency translation                                                                                       |       | 1,641                                 |       | 4,544                                |       | (247 | ) | 16,815 |   |
| Comprehensive  loss                                                                                                 |       | (29,880                               | )          | (52,951                              | )          | (180,384 | ) | (94,648 | ) |
|                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Comprehensive  loss attributable to noncontrolling interests (1)                                                    |       | (15                                   | )          | (6                                   | )          | (32 | ) | (526 | ) |
| Comprehensive  loss attributable to UTStarcom, Inc.                                                                 |       | $                                     | (29,865    | )                                    | $          | (52,945 | ) | $ | (180,352 | ) | $ | (94,122 | ) |

 

----

(1)          Comprehensive loss attributable tononcontrolling interests consisted primarily of net loss.

 

The changes innoncontrolling interests during the nine months ended September 30, 2009were as follows:

 
| ** **                                                   | ** ** | **Nine months  ended September 30,  2009** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)**                              | ** ** |
| Balance at January 1, 2009                              |       | $                                               | 808        |   |
| Comprehensive loss attributable to noncontrolling  interests |       | (32                                             | )          |
| Balance at September 30, 2009                           |       | $                                               | 776        |   |

 

**NOTE****6 — BALANCE SHEETDETAILS**

 

As of September 30,2009 and December 31, 2008, total inventories consisted of the following:

 
| ** **         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **         | ** ** | **(in thousands)**     | ** ** |
| **Inventories:**   | ** ** | ** **             | ** ** | ** **            | ** ** |
| Raw materials      |       | $                      | 8,955      |                  | $          | 15,545 |   |
| Work in process    |       | 12,424                 |       | 33,524                |       |
| Finished goods (1) |       | 146,073                |       | 140,763               |       |
| Total              |       | $                      | 167,452    |                  | $          | 189,832 |   |

 

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(1) Includesfinished goods at customer sites of approximately $140.6 million and $138.0million at September 30, 2009 and December 31, 2008, respectively,for which the customer has taken possession, but based on specific contractualterms, title has not yet passed to the customer.

 

**NOTE 7 -CASH, CASH EQUIVALENTS, INVESTMENTS AND FAIR VALUE MEASUREMENTS**

 

Cash and cash equivalents, consisting primarily ofbank deposits and money market funds, are recorded at cost which approximatesfair value because of the short-term nature of these instruments. There were noavailable-for-sale securities investments included in cash and cash equivalentsat September 30, 2009 or December 31, 2008. Short-term investments atSeptember 30, 2009, included bank notes of $3.1 million and anavailable-for-sale equity security, MRV of $1.4 million.  Short-term investments at December 31,2008 included $4.3 million bank notes. During the nine months ended September 30, 2008, the Company soldinvestments with a carrying value of $42.4 million and recognized gains of$39.7 million in other income, net.

 

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At September 30, 2009 and December 31, 2008, MRVCommunications (“MRV”) is the only available-for-sale security investmentrecorded at fair value (see additional discussion below), all other long-term investmentsare in privately-held companies and are accounted for under the costmethod.  Any unrealized holding gains orlosses are reported as a component of other comprehensive income, net ofrelated income tax effects.  Realizedgains and losses are reported in earnings. Accumulated other comprehensiveincome included approximately $0.7 million of unrealized holding gain at September 30,2009 and  $3.3 million of unrealizedholding loss at December 31, 2008 related to the Company’s investment inMRV.

 

The Company accepts banknotes receivable with maturity dates of between three and six months from itscustomers in China in the normal course of business.  The Company may discount these bank noteswith banking institutions in China. During the three months ended September 30,2009 and 2008, there were no bank notes sold. During the nine months ended September 30, 2009 and 2008, theCompany sold $9.9 million and $30.5 million of bank notes, respectively, andrecorded costs of less than $0.1 million and $0.4 million, respectively, as aresult of discounting the notes.

 

The following table showsthe break-down of the Company’s equity securities classified as long-terminvestments at September 30, 2009 and December 31, 2008:

 
| ** **                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                   | ** ** | **(in thousands)**     | ** ** |
| TET                          |       | $                      | —     |                  | $          | 4,800 |   |
| Cortina                      |       | 3,348                  |       | 3,348                 |       |
| MRV                          |       | —                 |       | 1,170                 |       |
| GCT SemiConductor, Inc. |       | 3,000                  |       | 3,000                 |       |
| Xalted Networks              |       | 1,583                  |       | 3,302                 |       |
| PCD LLC                      |       | —                 |       | 1,600                 |       |
| Other                        |       | 471                    |       | 471                   |       |
| Total equity securities      |       | $                      | 8,402      |                  | $          | 17,691 |   |

 

*TET*

 

In October 2008, the Company invested$4.8 million into Turnstone Environment Technologies LLC (“TET”), inexchange for approximately 22% of voting interest. The Company is not obligatedto make further capital contributions. TET’s mission is to secure the exclusivelicensing rights to technologically-proven environmentally friendly, renewableenergy technologies for distribution to various emerging markets, with aninitial focus on India. TET is considered as a variable interest entity wherethe Company is the primary beneficiary and does not hold a majority votinginterest. The assets, liabilities and operating results of TET were determinedto be immaterial as of December 31, 2008 and, therefore, were notconsolidated.  As of and for the threeand nine months ended September 30, 2009, the financial statements of TETwere included in the consolidated balance sheet and the statement of operationsof the Company (see Note 17).

 

*MRV*

 

On July 1,2007, Fiberxon, an investment in which the Company had a 7% ownership interest,completed a merger with MRV, which is a publicly-traded company in an activemarket. In exchange for the Company’s interest in Fiberxon, the Company wasentitled to receive $1.5 million in cash, 1,519,365 shares of MRV commonstock valued at approximately $4.5 million and deferred consideration ofapproximately $2.7 million. The deferred consideration becomes payableupon the completion of certain milestones and may be reduced by legitimateclaims of MRV for certain matters related to the merger. In the third quarterof 2007, the Company was paid the cash consideration of $1.5 million,received 1,519,365 shares of MRV common stock and recognized a gain oninvestment of $2.9 million.

 

During the second quarterof 2009, the trading of MRV common stock on the NASDAQ Global Market wassuspended as a result of MRV’s failure to file its delinquent periodic reportswith the SEC after numerous extensions granted by the staff of the Nasdaq StockMarket, Inc.  As a result of thedelisting from the NASDAQ Global Market, management re-evaluated the carryingvalue of this investment, including reviewing MRV’s cash position, recentfinancing activities, financing needs, earnings/revenue outlook, operationalperformance, and competition. Based on this review and consideration of theduration and extent of the decline in MRV fair value, the Company determinedthat the decline in MRV fair value was other-than-temporary and recorded a$3.8 million impairment charge for this investment in other income(expense), net in the second quarter of 2009. At both September 30, 2009 and December 31,2008, MRV is the only investment accounted for under the authoritative guidanceof FASB ASC 320, *Investments-Debt*

 

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*and Equity Securities*.  Prior to the third quarter of 2009, the Companyclassified MRV as a long-term investment.  During the third quarter of2009, the Company made the determination that the investment in MRV will beavailable for current sale to provide funds, as needed, for use in currentoperations.  Therefore, as of September 30 2009, the Companyclassified MRV as a short-term investment.

 

*XaltedNetworks*

 

In May 2005 and August 2005,the Company invested $2.0 million and $1.0 million, respectively, inXalted Networks (“Xalted”). In March 2006, the Company invested anadditional $0.3 million in Xalted. Xalted is a development stage companyproviding telecommunication operator customers with a comprehensive set ofnetwork systems, software solutions and service offerings. The Company had 9%ownership interest at December 31, 2008, on a fully diluted basis, inXalted and accounts for the investment using the cost method.  Duringthe third quarter of 2009, management re-evaluated the carrying value of thisinvestment, including reviewing Xalted’s cash position, recent financingactivities, financing needs, earnings/revenue outlook, operational performance,and competition. Based on this review, the Company determined that the declinein Xalted’s fair value was other-than-temporary and recorded a$1.7 million impairment charge for this investment in other income(expense) in the third quarter of 2009.

 

*PCD*

 

In connection with the divestiture of PCD, theCompany invested $1.6 million in equity units representing approximately a 2.6%ownership interest of PCD LLC.  Under theSettlement Agreement dated June 30, 2009, the Company granted PCD LLC anoption to repurchase the Company’s current equity position in PCD LLC within 90days of the date of the Settlement Agreement at its original investment cost of$1.6 million. In the third quarter of 2009, PCD LLC elected to exercise thecall option to repurchase all 2,199,214 Class A Units owned by theCompany.  The Company received cash of $1.6 million in September 2009and transferred all its equity holdings in Class A Units to PCD LLC. No gain or loss was recorded on this transfer as the carrying value of theequity holdings was equal to the proceeds received.

 

**FairValue Measurements**

 

FASBASC 820, “Fair Value Measurements and Disclosures”, clarifies that fair valueis an exit price, representing the amount that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants. As such, fair value is a market-based measurement thatshould be determined based on assumptions that market participants would use inpricing an asset or liability. As a basis for considering such assumptions,FASB ASC 820-10-35 establishes a three-tier value hierarchy, which prioritizesthe inputs used in measuring fair value as follows: (Level 1) observable inputssuch as quoted prices in active markets; (Level 2) inputs other than the quotedprices in active markets that are observable either directly or indirectly; and(Level 3) unobservable inputs in which there is little or no market data, whichrequire us to develop our own assumptions. This hierarchy requires the Companyto use observable market data, when available, and to minimize the use ofunobservable inputs when determining fair value. On a recurring basis, theCompany measures certain financial assets at fair value, including itsmarketable securities.

 

AtSeptember 30, 2009, the Company’s investment in MRV, which is currentlylisted in an over-the-counter exchange, is recorded at fair value, classifiedwithin Level 1 of the fair value hierarchy and its money market funds arerecorded at cost which approximates fair value, classified within Level 1of the fair value hierarchy.  The Companyhas no other financial assets or liabilities that are being measured at fairvalue at September 30, 2009.

 

**NOTE 8 -WARRANTY OBLIGATIONS AND OTHER GUARANTEES**

 

The Companyprovides a warranty on its equipment and handset sales for a period generallyranging from one to two years from the time of final acceptance. At times, theCompany has entered into arrangements to provide limited warranty services forperiods longer than two years. The Company provides for the expected cost ofproduct warranties at the time that revenue is recognized based on anassessment of past warranty experience and when specific circumstances dictate.The Company assesses the adequacy of its recorded warranty liability everyquarter and makes adjustments to the liabilities if necessary. From time totime, the Company may be subject to additional costs related to non-standardwarranty claims from its customers. If and when this occurs, the Companyestimates additional accruals based on historical experience, communicationwith its customers and various assumptions that the Company believes to bereasonable under the circumstances. Such additional warranty accruals arerecorded in the period in which the additional costs are identified.

 

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The following tablesummarizes the activity related to warranty obligations during the three andnine months ended September 30, 2009 and 2008:

 
| ** **                                                                     | ** ** | **Three months ended September  30,** | ** ** | **Nine months ended September  30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                    | ** ** |
| Balance  at beginning of period                                                |       | $                                     | 33,824     |                                 | $          | 35,580 |   | $ | 29,840 |   | $ | 52,734 |   |
| Warranty  accruals, net of expirations                                         |       | (1,124                                | )          | 4,234                                |       | 9,709 |   | 15,821 |   |
| Settlements  made during the period                                            |       | (10,057                               | )          | (5,060                               | )          | (16,906 | ) | (23,677 | ) |
| Warranty  obligations related to PCD reclassified to liabilities held for sale |       | —                                |       | —                               |       | — |   | (10,124 | ) |
| Balance  at end of period                                                      |       | $                                     | 22,643     |                                 | $          | 34,754 |   | $ | 22,643 |   | $ | 34,754 |   |

 

During the second quarter of 2009, the Company recorded a specialwarranty charge related to certain handsets sold to PCD LLC. Under the Settlement Agreement with PCD LLC (see Note 3), the Companyagreed to pay PCD LLC $8.4 million to settle certain PCD LLC customers’warranty claims arising from the handsets sold to PCD LLC.  The $8.4 million claim settlement was paid inthe third quarter of 2009 and is included in settlements made during the periodfor the three and nine months ended September 30, 2009 in the table above.

 

Certain of the Company’ssales contracts include provisions under which customers would be indemnifiedby the Company in the event of, among other things, a third-party claim againstthe customer for intellectual property rights infringement related to theCompany’s products.  There are nolimitations on the maximum potential future payments under theseguarantees.  The Company has not accruedany amount in relation to these provisions as no such claims have developedinto assertable claims and the Company believes it has defensible rights to theintellectual property embedded in its products.

 

**NOTE 9 -RESTRUCTURING COSTS AND OTHER INITIATIVES**

 

***RestructuringCosts***

 

Forthe three and nine months ended September 30,2009, the Company recorded restructuring charges of $8.9 million and $41.5million, respectively.  No restructuringcharges were recorded in the comparable periods in 2008. The Companyexpects to incur additional restructuring charges over the next twelve months as it continues to execute the 2009 and 2008 Restructuring Plans.  The following describes the Company’srestructuring initiatives.

 

*2009 Restructuring Plan*

 

On June 9, 2009, theBoard of Directors of the Company approved a restructuring plan (the “2009Restructuring Plan”) designed to reduce the Company’s operating costs. The 2009 Restructuring Plan includes a worldwide reduction in force ofapproximately 50% of the Company’s headcount, or approximately 2,300 employeeslocated primarily in China and the United States and, to a lesser degree, otherinternational locations.  During the three and nine months ended September 30, 2009, the Companyrecorded restructuring costs of approximately $9.2 million and $35.1 million,respectively, related to the 2009 Restructuring Plan.  Restructuring costs for the nine months endedSeptember 30, 2009 included $33.6 millionfor severance and benefits related to approximately 2,070 employees and $1.5 million related primarily to theestimated loss on a lease obligation which expires in 2013.

 

*2008 Restructuring Plan*

 

During fiscal 2008, the Company implementeda restructuring plan (the “2008 Restructuring Plan”) and recorded $13.1 millionin restructuring charges primarily related to a global reduction in forceacross all functions and employee terminations at certain non-core operationswhich the Company is in the process of winding down. The totalnumber of employees affected totaled approximately 750, including 350 inChina, 200 in Korea and 200 in other locations including theUnited States.  The charges for the nine months ended September 30,2009 consist primarily of severance and benefits related to the transition ofcertain key functions, including finance, to China and the divestiture of theCompany’s Korea operations and lease costs related to a lease obligation whichexpires in fiscal year 2010.

 

*2007 Restructuring Plan*

 

At September 30, 2009 the restructuring accrual for the 2007 Planincluded within other liabilities of approximately $0.5 million was related toa lease obligation which expires in fiscal year 2010.

 

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The activity inthe accrued restructuring balances related to the plans described above was asfollows for the nine months ended September 30, 2009:

 
| ** **                            | ** ** | **Balance at  December 31,  2008** | ** ** | **Restructuring  Charges** | ** ** | **Cash Payments** | ** ** | **Non-cash  Settlement** | ** ** | **Balance at  September 30, 2009** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|----------------------------|------------|-------------------|------------|--------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **(in thousands)**                      | ** ** |
|                                  | ** ** | ** **                              |       |                       |       |              |       |                     |       |                                    |       |
| 2009 Restructuring Plan               | ** ** | ** **                              |       |                       |       |              |       |                     |       |                                    |       |
| Workforce Reduction                   |       | $                                       | —     |                       | $          | 33,620            |       | $                        | (13,542    | )                                       | $          | (1,569 | ) | $ | 18,509 |   |
| Lease Costs                           |       | —                                  |       | 1,516                      |       | (215              | )          | **—**               |       | 1,301                                   |       |
| Other Costs                           |       | —                                  |       | 7                          |       | (7                | )          | —                   |       | —                                  |       |
| Total 2009 Restructuring Plan         |       | —                                  |       | 35,143                     |       | (13,764           | )          | (1,569                   | )          | 19,810                                  |       |
|                                  | ** ** | ** **                              |       |                       |       |              |       |                     |       |                                    |       |
| 2008 Restructuring Plan               | ** ** | ** **                              |       |                       |       |              |       |                     |       |                                    |       |
| Workforce Reduction                   |       | 7,976                                   |       | 5,189                      |       | (9,278            | )          | (880                     | )          | 3,007                                   |       |
| Lease Costs                           |       | 249                                     |       | 1,075                      |       | (703              | )          | **—**               |       | 621                                     |       |
| Other Costs                           |       | 498                                     |       | (126                       | )          | (314              | )          | —                   |       | 58                                      |       |
| Total 2008 Restructuring Plan         |       | 8,723                                   |       | 6,138                      |       | (10,295           | )          | (880                     | )          | 3,686                                   |       |
|                                  |       |                                    |       |                       |       |              |       |                     |       |                                    |       |
| 2007 Restructuring Plan - Lease Costs |       | 788                                     |       | 204                        |       | (504              | )          | —                   |       | 488                                     |       |
|                                  |       |                                    |       |                       |       |              |       |                     |       |                                    |       |
| Total                                 |       | $                                       | 9,511      |                       | $          | 41,485            |       | $                        | (24,563    | )                                       | $          | (2,449 | ) | $ | 23,984 |   |

 

The following table showsthe total amount of costs incurred by segment in connection with therestructuring plans:

 
| ** **                           | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                    | ** ** | **2009**                                  | ** ** |
| ** **                           | ** ** | **(in thousands)**                          | ** ** |
| Multimedia Communications            |       | $                                           | 15         |                                      | $          | 5,482 |   |
| Broadband Infrastructure             |       | (777                                        | )          | 2,503                                     |       |
| Handsets                             |       | 1,314                                       |       | 3,079                                     |       |
| Services                             |       | 2,456                                       |       | 5,919                                     |       |
| Total restructuring costs by segment |       | 3,008                                       |       | 16,983                                    |       |
| General and Corporate                |       | 5,901                                       |       | 24,502                                    |       |
| Total restructuring costs            |       | $                                           | 8,909      |                                      | $          | 41,485 |   |

 

The majority of theremaining cash expenditures related to the 2009 and 2008 Restructuring Plansare expected to be paid in the next two quarters, with lesser amounts expectedto be paid in the remainder of 2010.  Theremaining liabilities related to lease obligations are expected to be settledover the remaining lease term.

 

***OtherInitiatives***

 

In June 2009,the Company announced its intention to consider a potential sale of itsmanufacturing, research and development, and administrative offices facility inHangzhou, China. Accordingly, management performed a recoverability assessmentof this asset at June 30, 2009 using the income capitalization approach toestimate fair value.  During the thirdquarter of 2009, the Company contracted with a commercial real estate agent toassist in evaluating a potential sale of the facility. Furthermore, in October 2009,the Company initiated actions to consolidate the Company’s use of the facilityto reduce its operating costs that revised its projected occupancy needs. Inlight of these developments in the third quarter of 2009 the Company performeda 

 

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recoverability assessmentof the facility as of September 30, 2009. The carrying value of the Hangzhou facility as of September 30,2009 is $160.5 million. Management initially considered whether usingcomparable market transaction activity (market comparison approach) to estimatefair value of the facility would be both feasible and sufficiently objective inthe circumstances but concluded the secondary market for similar industrialproperties from which to derive sales data was not sufficiently robust to placeprimary reliance on this valuation approach. Therefore, management used theincome capitalization approach to estimate fair value. The incomecapitalization approach involves estimating a current market rental for thefacility through an analysis of rents of similar facilities, either in thelocality or in comparable districts, and then using an applicablecapitalization rate to estimate fair value. This resulted in determining thatthe estimated fair value approximates the carrying value of the Hangzhoufacility. No impairment charge was recorded in the third quarter of 2009. Theincome capitalization approach is subjective in nature and involves variousassumptions about the capitalization rate and relevant market rents. Anysignificant change in the assumptions may result in an impairment charge. While thedetermination of estimated fair value was based on a generally acceptedvaluation method, China commercial real estate market historically experiencedmarket fluctuations. Also, future additional relevant information may becomeavailable from market participants specific to the area the property islocated.  If there is a material changein the conditions or circumstances influencing the fair value, the Company maybe required to recognize an impairment charge which may have a significantimpact on its results of operations and financial position.

 

**NOTE 10- COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

*Securities Class Action Litigation*

 

Beginning in October 2004, several shareholder class actionlawsuits alleging federal securities violations were filed against the Companyand various officers and directors of the Company. The actions have beenconsolidated in United States District Court for the Northern District ofCalifornia under the caption *In re UTStarcom, Inc.Securities Litigation*, Master File No. C-04-4908-JW (PVT). Thelead plaintiffs in the case filed a First Amended Consolidated Complaint on July 26,2005. The First Amended Complaint alleged violations of the Securities ExchangeAct of 1934, and was brought on behalf of a putative class of shareholders whopurchased the Company’s stock after April 16, 2003 and before September 20,2004. On April 13, 2006, the lead plaintiffs filed a Second AmendedComplaint adding new allegations and extending the end of the class period to October 6,2005. In addition to the Company defendants, the plaintiffs are also suingSoftbank. Plaintiffs’ complaint seeks recovery of damages in an unspecifiedamount.

 

On June 2, 2006, the Company and the individual defendantsfiled a motion to dismiss the Second Amended Complaint. On March 21, 2007,the Court granted defendants’ motion and dismissed plaintiffs’ Second AmendedComplaint. The Court granted plaintiffs leave to file a Third AmendedComplaint, which plaintiffs filed on May 25, 2007. On July 13, 2007,the Company and the individual defendants filed a motion to dismiss and amotion to strike the Third Amended Complaint. On March 14, 2008, the Courtgranted defendants’ motion and dismissed plaintiffs’ Third Amended Complaint.The Court granted plaintiffs leave to file a Fourth Amended Complaint,which plaintiffs filed on May 14, 2008. On June 13, 2008, consistentwith the Court’s March 14, 2008 dismissal order, the Company and theindividual defendants filed objections to the form and content of the FourthAmended Complaint. On July 24, 2008, the Court overruled the objections.On September 8, 2008, the Company and the individual defendants filed amotion to dismiss and a motion to strike certain allegations from the FourthAmended Complaint. On March 27, 2009, the Court denied defendants’ motionto dismiss and granted defendants’ motion to strike. Discovery and motionpractice are ongoing in this litigation. No trial date has been set.

 

Due to the status of this lawsuit and uncertainties related tolitigation, management is unable to evaluate the likelihood of either afavorable or unfavorable outcome. Accordingly, management is unable at thistime to estimate the effects of this lawsuit on the Company’s financial position,results of operations, or cash flows.

 

On September 4,2007, a second shareholder class action complaint captioned *Peter Rudolph v. UTStarcom, et al.*, Case No. C-07-4578 SI,was filed in the United States District Court for the Northern District ofCalifornia against the Company and some of its current and former directors andofficers. The complaint alleges violations of the Securities Exchange Act of1934 through undisclosed improper accounting practices concerning the Company’shistorical equity award grants. Plaintiff seeks unspecified damages on behalfof a purported class of purchasers of the Company’s common stock between July 24,2002 and September 4, 2007. On December 14, 2007, the Court appointedJames R. Bartholomew lead plaintiff. On January 25, 2008, the leadplaintiff filed an amended complaint, which changed the purported class periodto between September 4, 2002 and July 24, 2007. On April 14,2008, the Court granted defendants’ motion to dismiss the amended complaint.The Court granted the lead plaintiff leave to file a second amendedcomplaint no later than May 16, 2008 which was filed by the lead plaintiffon May 16, 2008. On June 6, 2008, defendants filed a motion todismiss the second amended complaint. On August 21, 2008, the Courtgranted in part and denied in part the motion to dismiss. The parties havereached a settlement in the case.  On September 25,2009, the Court  approved thesettlement and entered final judgment.   Under thesettlement, the insurers pay the full amount of the settlement share allocatedto the Company, and the 

 

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Company bears no financial liability.  The Company, as well as theofficer and director defendants who were previously dismissed from the actionpursuant to tolling agreements, receive complete dismissals from the case underthe settlement. One or more class members may elect to appeal theCourt’s decision.  Accordingly,management of the Company is unable at this time to estimate the effects ofthis lawsuit on the Company’s financial position, results of operations, orcash flows.  If the settlement issuccessfully appealed and litigation against the Company continues, the Companybelieves it has meritorious defenses and intends to defend the actionvigorously.

 

*Governmental Investigations*

 

In December 2005, the U.S. Embassy in Mongolia informedthe Company that it had forwarded to the Department of Justice (the “DOJ”)allegations that an agent of the Company’s Mongolia joint venture had offeredpayments to a Mongolian government official in possible violation of theForeign Corrupt Practices Act (the “FCPA”). The Company, through its AuditCommittee, authorized an independent investigation into possible violations ofthe FCPA, and it has been in contact with the DOJ and U.S. Securities andExchange Commission (the “SEC”) regarding the investigation. The investigationhas identified possible FCPA violations in Mongolia, Southeast Asia, India, andChina, as well as possible violations of U.S. immigration laws. The DOJhas requested that the Company voluntarily produce documents related to theinvestigation, the SEC has subpoenaed the Company for documents, and theCompany has received a Grand Jury Subpoena requiring the production ofdocuments related to one aspect of the DOJ investigation, that is, trainingprograms the Company had sponsored. The SEC has indicated it regards travelarrangements provided to customers in China in connection with certain systemscontracts, and other conduct, as violations. The Company has executed tollingagreements extending the statute of limitations for the FCPA issues underinvestigation by the DOJ. Such proceedings may result in criminal or civilsanctions, penalties and disgorgements against the Company. If it is probablethat an obligation of the Company exists and will result in an outflow ofresources, a provision will be recorded if the amount can be reasonably estimated.Regulatory and legal proceedings as well as government investigations ofteninvolve complex legal issues and are subject to substantial uncertainties.Accordingly, management exercises considerable judgment in determining whetherit is probable that such a proceeding will result in outflow of resources andwhether the amount of the obligation can be reasonably estimated. The Companyperiodically reviews the status of these proceedings and these judgments aresubject to change as new information becomes available. At this time, theCompany cannot predict when any inquiry will be completed or what the outcomeof any inquiry will be. A judgment against the Company may have a materialadverse effect on the Company’s financial position, results of operations andcash flows.

 

*Shareholder Derivative Litigation*

 

On November 17, 2006, a shareholder derivative complaintcaptioned *Ernesto Espinoza v. Ying Wuet al.*, Case No. RG06298775, was filed against certain ofthe Company’s current and former officers and directors in the Superior Courtof the County of Alameda, California. The complaint alleges that the individualdefendants, among other things, breached their duties, were unjustly enriched,and violated the California Corporations Code in connection with the timing ofstock option grants. The complaint names the Company as a nominal defendant andseeks unspecified monetary damages against the individual defendants andvarious forms of injunctive relief. On February 2, 2007, the Company andthe individual defendants filed demurrers against the complaint. On April 11,2007, the Court sustained the individual defendants’ demurrer, overruledthe Company’s demurrer, ordered the plaintiff to file an amended complaint, andordered the Company to answer the original complaint. The plaintiff filed anamended complaint and the Company has filed an answer to the amended complaint.On August 21, 2007, the individual defendants filed demurrers against theamended complaint. The Court sustained the individual defendants’ demurrers andordered the plaintiff to file a second amended complaint. On September 26,2008, plaintiff filed his second amended complaint. On November 21, 2008,the Company and the individual defendants filed demurrers against the secondamended complaint. On February 27, 2009, the Court sustained the Company’sdemurrer and ordered the plaintiff to file a third amended complaint. On March 20,2009, plaintiff filed his third amended complaint. On May 5, 2009, theCompany and the individual defendants filed demurrers against the third amendedcomplaint. On August 11, 2009, the Court sustained the Company’s demurrerwithout leave to amend. On October 13, 2009, plaintiffs filed a notice ofappeal.

 

Due to the status of this lawsuit and uncertainties related tolitigation, management is unable to evaluate the likelihood of either afavorable or unfavorable outcome. Accordingly, management of the Company isunable at this time to estimate the effects of this lawsuit on the Company’sfinancial position, results of operations, or cash flows.

 

*IPO Allocation*

 

On October 31, 2001,a complaint was filed in United States District Court for the Southern Districtof New York against the Company, some of the Company’s directors and officersand various underwriters for the Company’s initial public offering.Substantially similar actions were filed concerning the initial publicofferings for more than 300 different issuers, and the cases were coordinatedas *In re Initial Public Offerings SecuritiesLitigation*, Civil Action No. 01-CV-9604.  Plaintiffs allege violations of the 

 

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Securities Act of 1933and the Securities Exchange Act of 1934 through undisclosed improperunderwriting practices concerning the allocation of IPO shares in exchange forexcessive brokerage commissions, agreements to purchase shares at higher pricesin the aftermarket and misleading analyst reports.  Plaintiffs seek unspecified damages on behalfof a purported class of purchasers of the Company’s common stock between March 2,2000 and December 6, 2000.  TheCompany’s directors and officers have been dismissed without prejudice pursuantto a stipulation.  On February 19,2003, the Court granted in part and denied in part a motion to dismiss theclaims brought by defendants, including the Company.  The order dismissed all claims against theCompany except for a claim brought under Section 11 of the Securities Actof 1933, which alleges that registration statement filed in accordance with theIPO was misleading.

 

In 2007, a settlementthat had been pending with the Court since 2004 was terminated by stipulationof the parties to the settlement, after a ruling by the Second Circuit Court ofAppeals in six test cases in the coordinated proceeding (the action involvingthe Company is not one of the test cases) made it unlikely that the settlementwould receive final Court approval. Plaintiffs filed amended master allegations and amended complaints inthe six test cases, which the defendants in those cases moved to dismiss. In2008, the Court largely denied the defendants’ motion to dismiss the amendedcomplaints.

 

The parties have reached a global settlement of thelitigation.  On October 5, 2009, theCourt entered an Opinion and Order granting final approval of the settlement.Under the settlement the insurers will pay the full amount of the settlementshare allocated to the Company, and the Company will bear no financial liability.  The Company, as well as the officer anddirector defendants who were previously dismissed from the action pursuant totolling agreements, will receive complete dismissals from the case.  A group of objectors has filed a petitionrequesting permission to appeal the Court’s October 5, 2009 ordercertifying the settlement class. If for any reason the settlement does notbecome effective, we believe we have meritorious defenses to the claims.

 

*UTStarcom, Inc. v. Starent PatentInfringement Litigations*

 

On February 16,2005, the Company filed a suit against Starent for patent infringement in theU.S. District Court for the Northern District of California. In theComplaint, the Company asserts that Starent infringes UTStarcom patentU.S. Reg. No. 6,829,473 through Starent’s development and testing ofa software upgrade for its customer’s installed ST-16 Intelligent MobileGateways. The Company seeks, inter alia, declaratory and injunctive relief.Starent filed its answer and counterclaims, on May 31, 2005, denying theCompany’s allegations and seeking a declaration that the patent-in-suit is notinfringed, is invalid, and is unenforceable. On June 16, 2005, the Company filed a motion to strike Starent’saffirmative defense and dismiss Starent’s counterclaim alleging inequitableconduct. On July 19, 2005, the parties stipulated that Starent would filean amended answer and counterclaim by July 27, 2005 and that the Companywould withdraw its motion to strike.  TheCompany withdrew its motion to strike and on July 27, 2005, Starent filedits amended answer and counterclaim.  On August 10,2005, the Company responded to Starent’s amended counterclaim. In early December 2006,the Company filed a reissue application for the ‘473 patent with theUnited States Patent and Trademark Office. Starent has also filed forreexamination of the ‘473 patent. The reexamination and reissue were thenconsolidated.  Both UTStarcom and Starenthave responded to the first Office Action mailed on December 22, 2008 bythe Patent and Trademark Office in the consolidated proceedings.

 

On May 8,2007, the Company filed an additional suit against Starent and sixteenindividual defendants (who were all former employees of 3Com’s CommWorksdivision, of which the Company acquired certain assets in May of 2003) inthe Northern District of Illinois.  The causes of action include claimsfor patent infringement, misappropriation of trade secrets, intentionalinterference with business relations and prospective economic advantage anddeclarations of ownership of certain patent rights.  The Company seekscompensatory damages, punitive damages and injunctive relief.  After thecourt denied the defendant’s motion to dismiss the misappropriation of tradesecrets claims, on August 30, 2007, Defendants answered the Company’scomplaint, denying the Company’s allegations and asserting a number ofaffirmative defenses and counterclaims.  The Company filed an AmendedComplaint to allege additional related causes of action.  Starent moved todismiss certain causes of action of the Amended Complaint.  On May 30,2008, the Company amended its complaint to remove from suit U.S. patent6,978,128, and to add additional factual allegations relating to all defendantsin the case.  On July 23, 2008, the Court dismissed the Company’strade secret and contract-based counts.  The Company asked the Court toclarify that ruling and filed a motion for leave to file a Fourth AmendedComplaint containing the trade secret and contract-based counts.  Afterinitially granting Defendants’ motion to strike that complaint, the Courtreconsidered its order and granted the Company leave to file it.  TheFourth Amended Complaint has been filed.  On October 14,2008, Defendants moved to dismiss various counts of that Complaint, includingagain seeking to have the trade secret claims dismissed. On March 24,2009, the Court ruled on Defendants’ Motion.The Court denied Defendants’ motion to dismiss theCompany’s trade secret claims. However, to the extent the Company’s claimsagainst Defendants for intentional interference with businessrelations are based on misappropriation of the Company’s tradesecrets, the Court partially dismissed those claims, based upon the doctrine ofpreemption. The Court also dismissed, as not yet ripe for adjudication, oneof the patent claims brought by the Company. Finally the Courtalso dismissed contract-based claims and related claims againstindividual defendants who had previously been employed by the 3Com’s CommWorksdivision. On March 25, 2009, the Court denied themotion of Starent co-founder Anthony Schoener to dismiss him individually basedupon lack of personal jurisdiction. On April 21, 2009, Defendants answeredthe remaining claims against them.

 

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On August 27, 2008,the Company moved to dismiss Starent’s counterclaims.  On December 5,2008, the Court partially granted this motion.  On January 9, 2009,Starent filed amended counterclaims for non-infringement, invalidity andunenforceability of the asserted patents, tortuous interference withprospective economic advantage and trade secret misappropriation.  On January 26,2009, the Company filed an answer to the counterclaims and asserted variousaffirmative defenses.  On April 21, 2009, in connection withDefendants’ answers to the Company’s claims that remained after the Court’s March 24,2009 ruling on Defendants’ motion to dismiss the Fourth Amended Complaint, Starentand four of the Individual Defendants asserted counterclaims fornon-infringement, invalidity and unenforceability of the asserted patents,tortuous interference with prospective economic advantage and trade secretmisappropriation. On May 14, 2009 the Company filed an answer to thecounterclaims and asserted various affirmative defenses.

 

On June 10, 2009,the parties entered into a Stipulation whereby the Company agreed to dismissits claims for misappropriation of trade secrets against fifteen of theeighteen Individual Defendants (but not against Starent and three IndividualDefendants), intentional interference with business relations (against alldefendants), and four of the patent-related claims against the four IndividualDefendants named in those claims. The Stipulation also includes an agreementwhereby the patent-related counterclaims asserted against the Company by thefour Individual Defendants are dismissed. The fifteen Individual Defendantsalso agreed not to file any future claims or counterclaims against the Company(or its successors or assignees) relating to this action unless the Companyfiles further claims against them.  On July 10,2009, the parties entered into a Stipulation whereby the Company agreed todismiss its claim for copyright infringement against Starent.

 

Starent filed motions for summary judgment ofnon-infringement of U.S. Patent 7,173,905, U.S. Patent 6,684,256, and U.S.Patent 6,765,900. Starent also filed a motion for partial summary judgmentconcerning the Company’s trade secret claim. Starent filed a motion for summaryjudgment of invalidity of claim 6 of U.S. Patent 6,963,582.  On September 16, 2009, the Special Masterrecommended to the District Court that Starent’s motion for summary judgment ofnon-infringement of U.S. Patent 7,173,905 be granted.  On September 30, 2009, the Court adoptedthe Special Master’s recommendations and granted Starent’s motion for summaryjudgment of non-infringement of U.S. Patent 7,173,905.

 

On October 14,2009, the parties executed a settlement agreement, pursuant to which Starentpaid the Company a one time sum of $3.5 million in exchange for a perpetualroyalty free license to the Company’s patents, and the Company and Starent willdismiss with prejudice all claims, counterclaims and defenses asserted in theseactions.

 

*Other Litigation*

 

The Company is a party to other litigation matters and claimsthat are normal in the course of operations, and while the results of suchlitigation matters and claims cannot be predicted with certainty, management ofthe Company believes that the final outcome of such matters will not have amaterial adverse impact on the Company’s financial position, results ofoperations or cash flows.

 

***Letters ofcredit***

 

The Company issuesstandby letters of credit primarily to support international sales activitiesoutside of China and in support of purchase commitments.  When the Company submits a bid for a sale,often the potential customer will require that the Company issue a bid bond ora standby letter of credit to demonstrate its commitment through the bidprocess.  In addition, the Company may berequired to issue standby letters of credit as guarantees for advance customerpayments upon contract signing or performance guarantees.  The standby letters of credit usually expirewithout being drawn by the beneficiary thereof. Finally, the Company may issue commercial letters of credit in supportof purchase commitments.  As of September 30,2009 the Company had outstanding letters of credit approximating $32.9 million.At September 30, 2009 the Company had short-term restricted cash of $24.4million, and had long-term restricted cash of $9.1 million included in otherlong-term assets. These amounts primarily collateralize the Company’s issuancesof standby and commercial letters of credit.

 

**NOTE 11— STOCK INCENTIVE PLANS**

 

During the nine monthsended September 30, 2009, the Company granted equity awards includingrestricted stock, restricted stock units and stock options. Such awardsgenerally vest over a period of one to four years from the date of grant.  Restricted stock has the voting rights ofcommon stock and the shares underlying restricted stock are issued andoutstanding.

 

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In February 2008,the Compensation Committee granted 1,073,333 performance-based awards tocertain senior executive officers. During the third quarter of 2008, 233,333 of these contingently issuableshares were forfeited as a result of employee terminations.  On October 6, 2008, the performancerequirements with respect to 60,000 of these contingently issuable shares wereeliminated; these restricted stock units have a fair value of $2.69 per share,which equals the closing price of the Company’s common stock on the NASDAQGlobal Select Market on the measurement date of October 6, 2008. On February 18,2009, the Committee determined, based on the Company’s and each executiveofficer’s level of performance during the Company’s 2008 fiscal year, that anadditional 367,500 shares underlying the previously granted performance-basedrestricted stock units had been earned, each of these performance-basedrestricted stock units has a fair value of $1.27 per share, which equals theclosing price of the Company’s common stock on the NASDAQ Global Select Marketon the measurement date of February 18, 2009.  These restricted stock units vested 50% on February 27,2009 and will vest 50% on February 26, 2010.

 

In February 2009,the Compensation Committee also granted to senior executive officers 313,293restricted stock units with a four-year vesting and an additional 626,586performance-based awards, subject to the attainment of goals determined by theCompensation Committee.  The Company maybe subject to variable levels of expense related primarily to the varyinglevels of performance, as well as for fluctuations in the Company’s stock priceas these awards are “marked to market” periodically prior to the date of theCompensation Committee’s determination on performance.

 

To reduce the Company’slong term cost structure and manage shareholder dilution, the Company electedto terminate the ESPP program in February 2009 with an effective date of May 15,2009.  The cancellation has been accounted for as a settlement of sharesfor no consideration.  This resulted in an immediate expense recognitionof $1.2 million in the first quarter of 2009 associated with the unrecognizedcompensation for canceled purchase periods of the 24-month offering.

 

During the second quarterof 2009, an adjustment was made to increase the estimated forfeiture rate forequity awards of employees that are being included in the 2009 RestructuringPlan as the awards are not expected to ultimately vest.  The resulting net effect of the forfeiturerate adjustment was a decrease to the Company’s stock-based compensationexpense for the nine months ended September 30, 2009 by approximately $0.4million.

 

Certain executives of theCompany have employment contracts which provide for acceleration of allunvested equity awards in the event that the employee is terminated withoutcause.  During the second and thirdquarters of 2009, several executives were involuntarily terminated as part ofthe 2008 and 2009 Restructuring Plans. For the three and nine months ended September 30,2009, approximately $1.2 million and $1.9 million, respectively, ofunrecognized compensation costs related to the acceleration was recognized upontermination within restructuring.

 

The total stock-basedcompensation expense recognized in the condensed consolidated statements ofoperations was as follows:

 
| ** **                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                          | ** ** | **(in thousands)**                              | ** ** |
| Cost of net sales                   |       | $                                                    | 101        |                                                | $          | 182 |   | $ | 592 |   | $ | 776 |   |
| Selling, general and administrative |       | 1,516                                                |       | 3,154                                               |       | 5,572 |   | 11,180 |   |
| Research and development            |       | 237                                                  |       | 750                                                 |       | 1,321 |   | 1,974 |   |
| Restructuring                       |       | 1,153                                                |       | —                                              |       | 1,949 |   | — |   |
| Total                               |       | $                                                    | 3,007      |                                                | $          | 4,086 |   | $ | 9,434 |   | $ | 13,930 |   |

 

Option activity as of September 30,2009 and changes during the nine months ended September 30, 2009 were asfollows:

 
| ** **                                   | ** ** | **Number of  shares  outstanding** | ** ** | **Weighted  average  exercise  price** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **(in  thousands)**                | ** ** | ** **                             | ** ** |
| Options outstanding, December 31, 2008  |       | 8,767                              |       | $                                      | 9.63       |   |
| Options granted                              |       | 448                                |       | $                                      | 1.86       |   |
| Options exercised                            |       | (6                                 | )          | $                                      | 0.20       |   |
| Options forfeited or expired                 |       | (3,028                             | )          | $                                      | 10.01      |   |
| Options outstanding, September 30, 2009 |       | 6,181                              |       | $                                      | 8.89       |   |

 

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Nonvested restrictedstock and restricted stock units as of September 30, 2009, and changesduring the nine months ended September 30, 2009, were as follows:

 
| ** **                                 | ** ** | **Shares**         | ** ** | **Weighted  average grant  date fair value** | ** ** |
|--------------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** | ** **                                   | ** ** |
| Nonvested at December 31, 2008        |       | 6,712              |       | $                                            | 2.96       |   |
| Granted                                    |       | 1,537              |       | $                                            | 1.13       |   |
| Vested                                     |       | (3,085             | )          | $                                            | 2.82       |   |
| Forfeited                                  |       | (1,069             | )          | $                                            | 2.81       |   |
| Total nonvested at September 30, 2009 |       | 4,095              |       | $                                            | 2.41       |   |

 

At September 30,2009, there was approximately $10.4 million of total unrecognized compensationcost, related to non-vested stock options, restricted stock and restrictedstock units, as measured, which the Company expects to recognize over aweighted-average period of 1.6 years. For additional information regarding theCompany’s stock-based compensation plans, see the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**NOTE12 - INCOME TAXES**

 

As of December 31, 2008, the Company had gross unrecognized taxbenefits of $92.8 million and had certain deferred tax assets and thefederal tax benefit of state income tax items totaling $82.1million. Ifrecognized, the portion of gross unrecognized tax benefits that would decreasethe provision for income taxes and increase the Company’s net income isapproximately $10.7 million.

 

As of September 30,2009, the Company had gross unrecognized tax benefits of approximately $72.6million and had certain deferred tax assets and the federal tax benefit ofstate income tax items totaling $58.4 million. If recognized, the portion ofgross unrecognized tax benefits that would decrease the provision for incometaxes and decrease the Company’s net loss is approximately $14.2 million. TheCompany has reduced its total unrecognized tax benefits by approximately $26.5million during the first quarter of 2009 due to statute of limitationsexpirations and settlements of income tax audits. The portion of this $26.5million reduction of gross unrecognized tax benefits that decreased theprovision for income taxes and decreased the Company’s net loss during thequarter was approximately $1.4 million. The unrecognized tax benefits relateprimarily to the allocations of revenue and costs among the Company’s globaloperations.

 

The Company recognizesinterest expense and penalties related to the above unrecognized tax benefitswithin income tax expense. The Company had accrued interest and penalties ofapproximately $3.9 million as of December 31, 2008 and approximately $3.1million as of September 30, 2009. The Company has reduced its interestexpense and penalties recorded within income tax expense by approximately $1.4million during the first quarter of 2009 due to statute of limitationsexpirations and settlements of income tax audits.

 

The Company is subject to taxation in the U.S. federaljurisdiction and various U.S. state and foreign jurisdictions. The Companyis under audit by the taxing authorities in China on a recurring basis. Thematerial jurisdictions that the Company is subject to examination are in theUnited States and China. The Company’s tax years for 1999 through 2008 arestill open for examination in China. The Company’s tax years for 2006 through2008 are still open for examination in the United States.

 

FASB ASC 740-10 establishes criteria for recognizing or continuing torecognize only more-likely-than-not tax positions, which may result in incometax expense volatility in future periods. While the Company believes that ithas adequately provided for all tax positions, amounts asserted by taxingauthorities could be greater than the Company’s accrued position. Accordingly,additional provisions on income tax related matters could be recorded in thefuture as revised estimates are made or the underlying matters are settled orotherwise resolved.

 

In establishing its deferred income tax assets and liabilities, theCompany makes judgments and interpretations based on the enacted tax laws andpublished tax guidance applicable to its operations. The Company recordsdeferred tax assets and liabilities and evaluates the need for valuationallowances to reduce the deferred tax assets to realizable amounts. Thelikelihood of a material change in the Company’s expected realization of theseassets is dependent on future taxable income and its ability to use foreign taxcredit carryforwards and carrybacks.

 

Income tax benefit was$0.3 million for the three months ended September 30, 2009 compared to taxexpense of $7.8 million for the three months ended September 30, 2008.Income tax expense was $6.2 million for the nine months ended September 30,2009 compared to tax expense of $7.4 million for the nine months ended September 30,2008.

 

Duringthe second quarter of 2009, the Company made an assessment of the realizabilityof its deferred tax assets in Korea, which are included in the Handsetssegment, and believes that it will not generate sufficient income to realizeits deferred tax assets in Korea. Therefore, it established a valuation allowance on its remaining netdeferred tax assets in Korea.  The incometax expense associated with establishing the valuation allowance is $1.4million. Income taxexpense for the nine months ended September 30, 2009 also included a firstquarter tax benefit of $2.8 million related to the recognition of previouslyunrecognized tax benefits and the reversal of interest and penalties due tostatute of limitations expirations and income tax audit settlements.

 

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In the third quarter of2008, due to the sale of PCD, the Company believed that it would not generatesufficient income in Canada to realize its deferred tax assets in Canada.Therefore, the Company established a valuation allowance on its net deferredtax assets in Canada. The income tax expense associated with establishing thevaluation allowance was $1.8 million and was recorded in the third quarter of2008.

 

The China CorporateIncome Tax Law (“CIT Law”) was effective on January 1, 2008.  As a result of the enactment of regulationsduring the first quarter of 2008 which addressed CIT Law, the Company recordedan income tax benefit of $11.7 million related to reversing a deferred taxliability on foreign withholding taxes related to the unremitted earnings ofthe Company’s subsidiaries which the Company had previously determined to notbe permanently reinvested outside the United States.  The Company also accrued $3.2 million offoreign withholding taxes related to the realized gain on the sale of itsinvestment in Gemdale.

 

For 2009 and 2008, theCompany has not provided any tax benefit on any forecasted losses incurred andtax credits generated in the United States and other countries, becausemanagement believes that it is more likely than not that the tax benefitassociated with these losses will not be realized. Also, for 2009 and 2008, theCompany continues to accrue tax expense in jurisdictions where the Company hasbeen historically profitable. Estimates of the annual effective tax rate at theend of the interim periods are based on evaluations of possible future eventsand transactions and may be subject to subsequent refinement or revision.

 

**NOTE 13 - OTHER INCOME (EXPENSE), NET**

 

Other income (expense), net for the three and ninemonths ended September 30, 2009 and 2008, respectively were comprised ofthe following:

 
| ** **                                                                     | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                           |       | **(in thousands)**                         |       |
| Gain on sale of investments                                                    |       | $                                          | —     |                                      | $          | — |   | $ | — |   | $ | 39,679 |   |
| Gain on liquidation of investment in a variable interest  entity (see Note 17) |       | —                                     |       | —                                    |       | — |   | 8,169 |   |
| Other-than-temporary impairment of equity investment                           |       | (1,719                                     | )          | (4,308                                    | )          | (5,517 | ) | (4,308 | ) |
| Foreign exchange gains (losses)                                                |       | (11                                        | )          | (10,577                                   | )          | 1,734 |   | (6,427 | ) |
| Other                                                                          |       | 174                                        |       | (58                                       | )          | 442 |   | 994 |   |
| Total                                                                          |       | $                                          | (1,556     | )                                         | $          | (14,943 | ) | $ | (3,341 | ) | $ | 38,107 |   |

 

**NOTE 14- SEGMENT REPORTING**

 

To align thebusiness units with its corporate strategy to focus on core businesses, on July 1, 2008 theCompany sold PCD to PCD LLC (see Note 3). Prior to July 1, 2008, PCDsold and supported handsets other than Personal Access Solution and Personal HandyphoneSystem (collectively “PAS”) handsets, mainly in the United States.Included in the Other segment are Mobile Solutions Business Unit (“MSBU”) andCustom Solutions Business Unit (“CSBU”). On July 31, 2008, the Company sold MSBU which was responsible forthe development, sales and service of the Company’s wireless IPCDMA/IPGSMproduct line. In the first quarter of 2009, the Company completed the wind-downof CSBU and the consolidation of voice messaging technology into its MultimediaCommunications segment. CSBU historically had been responsible for thedevelopment, sales and service of other non-core products. The consolidation ofvoice messaging technology into the Multimedia Communications segment did nothave a significant impact on segment net sales or gross profit. As a result ofthese changes the Company revised its internal reporting structure, operatingsegments and reporting segments.

 

Effective January 1,2009, the new reporting segments are as follows:

 

·                  MultimediaCommunications—Focused on development and market opportunities in IPTVsolutions and Wireless infrastructure technologies.

 

·                  BroadbandInfrastructure—Focused on the Company’s portfolio of broadband products.

 

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·                  Handsets—Focused on mobilephone business with continued focus on the PAS and CDMA handset market, as wellas data cards markets. Handset sales to PCD LLC, which commenced after theJuly 1, 2008 sale of PCD, are included in this segment.

 

·                  Services—Focused onproviding services and support of the Company’s Broadband Infrastructure andMultimedia Communications product lines.

 

The Company’s chief operatingdecision makers make financial decisions based on information they receive fromtheir internal management system and currently evaluate the operatingperformance of and allocate resources to the reporting segments based onsegment revenue and gross profit. Cost of sales and direct expenses in relationto production are assigned to the reporting segments.  The accounting policies used in measuringsegment assets and operating performance are the same as those used at the consolidatedlevel.

 

Summarized below are the Company’s segment netsales, gross (loss) profit and segment margin for the three and nine monthsended September 30, 2009 and 2008 based on the current reporting segmentstructure:

 
| ** **                            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                  | ** ** | **% of net  sales**                      | ** ** | **2008** | ** ** | **% of net  sales** | ** ** | **2009** | ** ** | **% of net  sales** | ** ** | **2008** | ** ** | **% of net  sales** | ** ** |
| ** **                            | ** ** | **(in thousands)**                        | ** ** |
| ***Net Sales by Segment***            |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia Communications             |       | $                                         | 22,214     |                                     | 32         | % | $ | 57,787 |   | 32 | % | $ | 95,215 |   | 35 | % | $ | 199,251 |   | 14 | % |
| Broadband Infrastructure              |       | 16,092                                    |       | 23                                       | %          | 31,112 |   | 17 | % | 45,094 |   | 17 | % | 92,591 |   | 7 | % |
| Handsets                              |       | 15,614                                    |       | 22                                       | %          | 71,906 |   | 40 | % | 84,858 |   | 31 | % | 165,390 |   | 12 | % |
| Services                              |       | 16,584                                    |       | 23                                       | %          | 14,197 |   | 8 | % | 44,840 |   | 17 | % | 41,172 |   | 3 | % |
| PCD                                   |       | —                                    |       | —                                   |       | — |   | — |   | — |   | — |   | 879,588 |   | 63 | % |
| Other                                 |       | —                                    |       | —                                   |       | 5,605 |   | 3 | % | — |   | — |   | 21,360 |   | 1 | % |
|                                  |       | $                                         | 70,504     |                                     | 100        | % | $ | 180,607 |   | 100 | % | $ | 270,007 |   | 100 | % | $ | 1,399,352 |   | 100 | % |
|                                  |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
| ** **                            | ** ** | ** **                                | ** ** | **Gross**                                | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                            | ** ** | **2009**                                  | ** ** | **Profit %**                             | ** ** | **2008** | ** ** | **Profit %** | ** ** | **2009** | ** ** | **Profit %** | ** ** | **2008** | ** ** | **Profit %** | ** ** |
| ** **                            | ** ** | **(in thousands)**                        | ** ** |
| ***Gross (loss) profit by  Segment*** |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia Communications             |       | $                                         | 10,122     |                                     | 46         | % | $ | 30,846 |   | 53 | % | $ | 32,752 |   | 34 | % | $ | 92,820 |   | 47 | % |
| Broadband Infrastructure              |       | 3,482                                     |       | 22                                       | %          | 3,032 |   | 10 | % | 5,716 |   | 13 | % | 6,922 |   | 7 | % |
| Handsets                              |       | 3,322                                     |       | 21                                       | %          | 14,965 |   | 21 | % | (24,597 | ) | (29 | )% | 37,961 |   | 23 | % |
| Services                              |       | 7,263                                     |       | 44                                       | %          | 4,720 |   | 33 | % | 16,132 |   | 36 | % | 11,832 |   | 29 | % |
| PCD                                   |       | —                                    |       | —                                   |       | — |   | — |   | — |   | — |   | 69,005 |   | 8 | % |
| Other                                 |       | —                                    |       | —                                   |       | 3,764 |   | 67 | % | — |   | — |   | 12,814 |   | 60 | % |
|                                  |       | $                                         | 24,189     |                                     | 34         | % | $ | 57,327 |   | 32 | % | $ | 30,003 |   | 11 | % | $ | 231,354 |   | 17 | % |

 
| ** **                                      | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                         | ** ** |
| ***Segment Margin (Loss)  and Operating Loss*** |       |                                       |       |                                      |       |   |   |   |   |
| Multimedia Communications                       |       | $                                          | 582        |                                      | $          | 16,585 |   | $ | 780 |   | $ | 49,042 |   |
| Broadband Infrastructure                        |       | (267                                       | )          | (3,222                                    | )          | (6,952 | ) | (12,162 | ) |
| Handsets                                        |       | 470                                        |       | 1,978                                     |       | (37,996 | ) | (3,444 | ) |
| Services                                        |       | 6,997                                      |       | 3,623                                     |       | 15,324 |   | 8,417 |   |
| PCD                                             |       | —                                     |       | —                                    |       | — |   | 53,576 |   |
| Other                                           |       | —                                     |       | (1,627                                    | )          | — |   | (11,970 | ) |
| Total segment margin (loss)                     |       | 7,782                                      |       | 17,337                                    |       | (28,844 | ) | 83,459 |   |
| General and Corporate                           |       | (41,576                                    | )          | (52,250                                   | )          | (149,243 | ) | (180,339 | ) |
| Operating Loss                                  |       | $                                          | (33,794    | )                                         | $          | (34,913 | ) | $ | (178,087 | ) | $ | (96,880 | ) |

 

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Assets by segmentare as follows:

 
| ** **                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                | ** ** | **(in thousands)**     | ** ** |
| ***Total assets***        |       |                   |       |                  |       |
| Multimedia Communications |       | $                      | 427,284    |                  | $          | 602,207 |   |
| Broadband Infrastructure  |       | 378,947                |       | 337,571               |       |
| Handsets                  |       | 88,770                 |       | 288,050               |       |
| Services                  |       | 109,077                |       | 75,633                |       |
| Other                     |       | —                 |       | 7,345                 |       |
|                      |       | $                      | 1,004,078  |                  | $          | 1,310,806 |   |

 

Sales are attributed to ageographical area based upon the location of the customer. Sales data bygeographical area are as follows:

 
| ** **                | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | ** **                                | ** ** | **% of net**                             | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                | ** ** | **2009**                                  | ** ** | **sales**                                | ** ** | **2008** | ** ** | **sales** | ** ** | **2009** | ** ** | **sales** | ** ** | **2008** | ** ** | **sales** | ** ** |
| ** **                | ** ** | **(in thousands)**                        | ** ** |
| ***Net Sales by region*** |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| United States             |       | $                                         | 10,664     |                                     | 15         | % | $ | 43,127 |   | 24 | % | $ | 53,654 |   | 20 | % | $ | 907,770 |   | 65 | % |
| China                     |       | 30,959                                    |       | 44                                       | %          | 97,605 |   | 54 | % | 134,708 |   | 50 | % | 325,479 |   | 23 | % |
| India                     |       | 14,399                                    |       | 20                                       | %          | 8,002 |   | 4 | % | 33,519 |   | 12 | % | 20,838 |   | 2 | % |
| Other                     |       | 14,482                                    |       | 21                                       | %          | 31,873 |   | 18 | % | 48,126 |   | 18 | % | 145,265 |   | 10 | % |
| Total net sales           |       | $                                         | 70,504     |                                     | 100        | % | $ | 180,607 |   | 100 | % | $ | 270,007 |   | 100 | % | $ | 1,399,352 |   | 100 | % |

 

Long-lived assets,consisting of property, plant and equipment, by geographical area are asfollows:

 
| ** **              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **              | ** ** | **(in thousands)**     | ** ** |
| United States           |       | $                      | 233        |                  | $          | 627 |   |
| China                   |       | 165,730                |       | 172,844               |       |
| Other                   |       | 677                    |       | 1,816                 |       |
| Total long-lived assets |       | $                      | 166,640    |                  | $          | 175,287 |   |

 

**NOTE15 - CREDIT RISK AND CONCENTRATION**

 

TheCompany’s accounts receivable balance included amounts due from China TelecomCompany-Jiangsu Branch representing approximately 15% at September 30, 2009.The Company’s accounts receivable balance included amounts due from PCD LLC,representing approximately 39% at December 31, 2008.

 

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Thefollowing customers accounted for 10% or more of the Company’s net sales:

 
| ** **       | ** ** | **For the three**      | ** ** | **For the nine**       | ** ** |
|------------------|------------|------------------------|------------|------------------------|------------|
| ** **       | ** ** | **months ended**       | ** ** | **months ended**       | ** ** |
| ** **       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **       | ** ** | **(% of net sales)**   | ** ** |
| **2009**         | ** ** | ** **             | ** ** | ** **             | ** ** |
| PCD LLC          |       | 11                     | %          | 16                     | %          |
|             |       |                   |       |                   |       |
| **2008**         | ** ** | ** **             | ** ** | ** **             | ** ** |
| Verizon Wireless |       | —                 |       | 24                     | %          |
| Sprint Spectrum  |       | —                 |       | 13                     | %          |
| PCD LLC          |       | 19                     | %          | 2                      | %          |

 

Approximately18% and 30% of the Company’s net sales during the three months ended September 30,2009 and 2008, respectively, and approximately 20% and 14% of the Company’s netsales during the nine months ended September 30, 2009 and 2008,respectively, were to entities affiliated with the government of China.Accounts receivable balances from these China government affiliated entities orstate owned enterprises were $60.0 million and $88.2 million as of September 30,2009 and December 31, 2008, respectively. The Company extends credit toits customers in China generally without requiring collateral. With respect toglobal sales outside of China, the Company may require letters of credit fromits customers. The Company monitors its exposure for credit losses andmaintains allowances for doubtful accounts.

 

Approximately 44% and 54% of the Company’s net salesfor the three months ended September 30, 2009 and 2008, respectively, andapproximately 50% and 23% of the Company’s net sales during the nine monthsended September 30, 2009 and 2008, respectively were made in China.Accordingly, the political, economic and legal environment, as well as thegeneral state of China’s economy may influence the Company’s business,financial condition and results of operations. The Company’s operations inChina are subject to special considerations and significant risks not typicallyassociated with companies in the United States. These include risks associatedwith, among others, the political, economic and legal environments and foreigncurrency exchange. The Company’s results may be adversely affected by, amongother things, changes in the political, economic and social conditions in China,and by changes in governmental policies with respect to laws and regulations,changes in China’s telecommunications industry and regulatory rules andpolicies, anti-inflationary measures, currency conversion and remittanceabroad, and rates and methods of taxation.

 

**NOTE 16- RELATED PARTY TRANSACTIONS**

 

*Softbankand affiliates*

 

The Company recognizesrevenue with respect to sales of telecommunications equipment to affiliates ofSoftbank, a significant stockholder of the Company. Softbank offers ADSL coveragethroughout Japan, which is marketed under the name “YAHOO! BB.” The Companysupports Softbank’s fiber-to-the-home service through sales of its carrierclass GEPON product as well as its NetRingÔproduct. In addition, the Company supports Softbank’s new internet protocoltelevision (“IPTV”), through sales of its RollingStreamÔproduct. The Company recognized revenue for sales of telecommunicationsequipment and services to affiliates of Softbank of $4.8 million and $9.7million, respectively, during the three months ended September 30, 2009and 2008, and $16.0 million and $30.9 million, respectively, during the ninemonths ended September 30, 2009 and 2008.

 

Included in accountsreceivable at September 30, 2009 and December 31, 2008 were $4.5million and $9.2 million, respectively, related to these transactions. TheCompany had immaterial amounts of accounts payable to Softbank and itsaffiliates at September 30, 2009 and December 31, 2008.

 

Sales to Softbank includea three year service period and a penalty clause if product failure ratesexceed a certain level over a seven year period. As of September 30, 2009and December 31, 2008, the Company’s customer advance balance related toSoftbank agreements was $0.2 million and $0.7 million, respectively.  The current deferred revenue balance relatedto Softbank was $1.5 million and $4.0 million as of September 30, 2009 andDecember 31, 2008, respectively.  Asof September 30, 2009, the Company’s noncurrent deferred revenue balancerelated to Softbank was $8.8 million compared to $9.2 million as of December 31,2008.

 

As of September 30,2009, Softbank beneficially owned approximately 11% of the Company’soutstanding stock.

 

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**NOTE17—VARIABLE INTEREST ENTITIES**

 

InOctober 2008, the Company made an investment in Turnstone EnvironmentTechnologies LLC (“TET”), a Delaware limited liability company formed forthe purpose of licensing and developing energy efficient renewable coolingsolutions for cell towers in the telecommunications industry. In exchange for5,180,788 Series A Preferred units representing approximately 22% ofvoting interest in TET and 500,000 Series A Preferred warrants at anexercise price of $0.9265 per unit and with an expiration term of 5 years,the Company contributed $4.8 million in cash. The Company currently doesnot have any representation on TET’s board of directors nor the ability tocontrol the management and operation decisions of TET. The operations of TETare in the development stage and the entity is actively seeking additionalinvestors. The Company does not intend to and has no obligation to fund futurelosses or make additional contributions other than its initial investment. Asof September 30, 2009 and December 31, 2008, TET was in effectentirely funded by the Company’s initial investment as the capitalcontributions of the other current investors were not substantive. The Companyhas determined that the venture is a variable interest entity and the Companyis the primary beneficiary because it is exposed to the majority of thevariable interest entity’s expected losses. Therefore, the Company is requiredto consolidate TET’s financial statements under ASC 810-10-15, VariableInterest Entities**Subsections. Beginning January 1,2009, the assets, liabilities and operating results of TET were consolidatedinto the Company’s balance sheet and statement of operations. The assets,liabilities and operating results of TET were determined to be immaterial tothe Company as of December 31, 2008 and to the Company’s results ofoperations and cash flows for the full year and the fourth quarter of 2008 and,therefore, were not consolidated. TET had no revenues and $3.2 million in expenses for thenine months ended September 30, 2009, of which $2.4 million relates toamortization of an acquired exclusive license to utilize solar coolingtechnology.  The Company initiallydetermined the appropriate amortization period for the exclusive license was tomatch the estimated revenue generation period from sale of products utilizingthe licensed technology. In the third quarter of 2009, as a result of the delayin revenue generation, the Company changed its estimate to a systematic andrational allocation of amortization expense based on the term of the technologylicense. As of September 30, 2009, the exclusive technology license had acarrying value, net of amortization, of $2.1 million. TET’s operations are not consideredto be integral to the Company’s major operating activities. As such, all incomeand expenses from TET’s operations, which are includable in the Company’sincome statement as a result of the application of ASC 810-10-15, VariableInterest Entities**Subsections, have beenclassified within operating expense.  Theconsolidation of TET represented $2.1 million of the total assetsand $0.5 million of thetotal liabilities of the Company as of September 30, 2009.

 

During the fourth quarter of 2005,the Company provided an interest free, $12.4 million loan to a party inChina as seed capital for a venture organized to participate in providingtechnical service, networking technology and equipment to the emerging marketfor IPTV products in China. The loan, partially secured by an indirectownership interest in the venture, was payable in 10 years and could becalled early without penalty. As a result of the foregoing, and the fact thatthe venture’s continuing viability was heavily dependent on the furtherprovision of network and terminal equipment by the Company, the Companydetermined that the venture was a variable interest entity (“VIE”) and that theCompany was the primary beneficiary of the venture. Therefore, the Company wasrequired to consolidate the VIE’s financial statements. The consolidation ofthis VIE in prior years did not have a significant impact on the Company’sconsolidated financial statements. In March 2008, the Company received arepayment in full of the loan’s principal balance, eliminating its interest inthe VIE, and resulting in reconsideration of the Company’s position as theprimary beneficiary. Based on this reconsideration event, management hasconcluded the Company is no longer the primary beneficiary and is no longerrequired to consolidate the VIE’s financial statements. The Company’sConsolidated Statement of Operations for the three month period ended March 31,2008 includes the operating results of the VIE through February 2008, atwhich point the VIE was deconsolidated from the Company’s financial statements.The Company recorded an $8.2 million gain upon the repayment of the loan anddeconsolidation that was included in other income, net, for the three monthsended March 31, 2008.  As management expects continuing involvementwith the ongoing entity’s business as a supplier of IPTV equipment, the Companyhas determined the conditions for presentation as a discontinued operation havenot been met.

 

**ITEM2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Qcontains forward-looking statements regarding future events and our futureresults that are subject to the safe harbors created under the Securities Actof 1933 and the Securities Exchange Act of 1934. Forward-looking statements arebased on current expectations, estimates, forecasts and projections about us,our future performance and the industries in which we operate as well as on ourmanagement’s assumptions and beliefs. Statements that contain words like “expects,”“anticipates,” “may,” “will,” “targets,” “projects,” “intends,” “plans,” “believes,”“seeks,” “estimates,” or variations of such words and similar expressions areforward-looking statements. In addition, any statements that refer to trends inour businesses, future financial results, and our liquidity and business plansare forward-looking statements. Readers are cautioned that theseforward-looking statements are only predictions and are subject to risks and uncertainties,including those discussed in “Part II, Item 1A-Risk Factors” of this Form 10-Q.  Therefore, actual results may differmaterially and adversely from those expressed in any forward-lookingstatements. We do not guarantee future results, and actual results,developments and business decisions may differ from those contemplated by thoseforward-looking statements.  We undertakeno obligation to update these forward-looking statements to reflect events orcircumstances occurring after the date of this Form 10-Q.

 

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**EXECUTIVESUMMARY**

 

We design, manufacture and sell IP-based telecommunicationsinfrastructure products including our primary product suite of InternetProtocol TV (“IPTV”), Next Generation Network (“NGN”) and broadband solutionsalong with the ongoing services relating to the installation, operation andmaintenance of these products. In addition, we also sell handsets that aredesigned and manufactured primarily for the China market. Our products are soldprimarily to telecommunications service providers or operators. We sell anextensive range of products that are designed to enable voice, data and videoservices for our operator customers and consumers around the world. Over thepast few years, we have expanded our focus to build a global presence andcurrently sell our products in several established and emerging growth marketsin Asia, Latin America and Europe. We intend to continue to invest in productswith technological differentiation likely to drive revenue growth and improvedmargins.  We also intend to maintain astrategic presence in the most attractive markets.

 

We differentiate ourselves with products designed to reduce networkcomplexity, integrate high performance capabilities and allow a simpletransition to next generation networks. We design our products to facilitatecost-effective and efficient deployment, maintenance and upgrades.

 

Because our products are IP-based, our customers can more easilyintegrate our products with other industry standard hardware and software.Additionally, we believe we can introduce new features and enhancements thatcan be cost-effectively added to our customers’ existing networks. IP-baseddevices can be changed or upgraded in modules, saving our customers the expenseof replacing their entire system installation.

 

**Overview of Our Third Quarter 2009**

 

·                  Net sales decreased by $110.1 million to $70.5 million during the threemonths ended September 30, 2009 compared to the same period in 2008. Thedecrease in net sales in the third quarter of 2009 was primarily due to thecontinued weakening demand for our Personal Access Solution and PersonalHandyphone System (collectively “PAS”) Infrastructure and Handsets products.

 

·                  Gross profit was $24.2 million, or 34% of net sales, in the threemonths ended September 30, 2009, compared to $57.3 million, or 32% ofnet sales, in the corresponding period of 2008. The decrease in gross profit in absolute dollars was mainly due to decrease in overall sales. Theincrease in gross profit as percentage of net sales was primarily due to lower provisionfor anticipated contract losses and sales of certain handsets during thequarter which were previously reserved.

 

·                  Selling, general and administrative andresearch and development operating expenses decreased 50% in the third quarterof 2009 compared with the third quarter of 2008 primarily as a resultmanagement restructuring and other cost reduction initiatives.

 

·                  In June 2009, our Board of Directorsapproved a restructuring plan (the “2009 Restructuring Plan”) designed toreduce operating expenses.  The 2009 Restructuring Plan includes aworldwide reduction in force of approximately 50% of our headcount. Theinitiatives also include plans to outsource manufacturing operations andoptimize research and development spending with a focus on selected products.We recognized $8.9 million and $41.5 million in restructuring charges duringthe three and nine months ended September 30, 2009, respectively, relatedto our 2009 Restructuring Plan and prior plans.

 

·                  In the third quarter of 2009 we divested our Korea operations to acompany founded by a former employee and recorded a loss on this divestiture ofapproximately $1.7 million.

 

**OtherInitiatives**

 

In June 2009,we announced our intention to consider a potential sale of our manufacturing,research and development, and administrative offices facility in Hangzhou,China. Accordingly, management performed a recoverability assessment of thisasset at June 30, 2009 using the income capitalization approach toestimate fair value.  During the thirdquarter of 2009, we contracted with a commercial real estate agent to assist inevaluating a potential sale of the facility. Furthermore, in October 2009,we initiated actions to consolidate our use of the facility to reduce ouroperating costs that revised our projected occupancy needs. In light of thesedevelopments in the third quarter of 2009 we performed a recoverabilityassessment of the facility as of September 30, 2009.  The carrying value of the Hangzhou facilityas of September 30, 2009 is $160.5 million. Management initiallyconsidered whether using comparable market transaction activity (marketcomparison approach) to estimate fair value of the facility would be bothfeasible and sufficiently objective in the circumstances but concluded thesecondary market for similar industrial properties from which to derive salesdata was not sufficiently robust to place primary reliance on this valuationapproach. Therefore, management used the income capitalization approach toestimate fair value.  The incomecapitalization approach involves estimating a current market rental for thefacility through an analysis of rents of similar facilities, either in thelocality or in comparable districts, and then using an applicable 

 

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capitalization rate toestimate fair value. This resulted in determining that the estimated fair valueapproximates the carrying value of the Hangzhou facility. No impairment chargewas recorded in the third quarter of 2009. The income capitalization approachis subjective in nature and involves various assumptions about thecapitalization rate and relevant market rents. Any significant change in theassumptions may result in an impairment charge. While the determination ofestimated fair value was based on a generally accepted valuation method, Chinacommercial real estate market historically experienced market fluctuations.Also, future additional relevant information may become available from marketparticipants specific to the area the property is located.  If there is a material change in theconditions or circumstances influencing the fair value we may be required torecognize an impairment charge which may have a significant impact on ourresults of operations and financial position. The building is approximately 2.7million square feet and unique in its design. We cannot predict whether we willbe able to sell the building or the amount at which we would ultimately be ableto sell the building should we enter into a sales transaction.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations isbased upon our Consolidated Condensed Financial Statements, which we haveprepared in accordance with GAAP. The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue and expenses, and related disclosure ofcontingent assets and liabilities. Estimates are based on historicalexperience, knowledge of economic and market factors and various otherassumptions that management believes to be reasonable under the circumstances.Actual results may differ from those estimates.

 

On a regular basiswe evaluate our estimates, assumptions and judgments and make changes accordingly.An accounting policy is deemed to be critical if it requires an accountingestimate to be made based on assumptions about matters that are highlyuncertain at the time the estimate is made, if different estimates reasonablycould have been used, or if changes in the estimate that are reasonably likelyto occur could materially impact the financial statements.  We believe that the estimates, assumptionsand judgments involved in revenue recognition, receivables and allowances fordoubtful accounts, accruals including third party commissions payable,restructuring liabilities, litigation and other contingencies, stock-basedcompensation, product warranty, variable interest entities, inventories,deferred costs, research and development and capitalized software developmentcosts, income taxes, impairment of intangible assets and long-lived assets, andvaluation and impairment of investments have the greatest potential impact onour Condensed Consolidated Financial Statements, so we consider these to be ourcritical accounting policies.  Managementbelieves that there have been no significant changes during the nine monthsended September 30, 2009 to the items that we disclosed as our criticalaccounting policies and estimates in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

For a description of thenew accounting standards that affect us, see Note 2 of Notes to ourCondensed Consolidated Financial Statements included under Part I,Item 1 of this Quarterly Report on Form 10-Q.

 

**RESULTSOF OPERATIONS**

 

To align thebusiness units with our corporate strategy to focus on core businesses, on July 1, 2008 we soldPCD to PCD LLC (see Note 3 of Notes to our Condensed ConsolidatedFinancial Statements included under Part I, Item 1 of this QuarterlyReport on Form 10-Q).  Prior to July 1,2008, PCD sold and supported handsets other than PAS handsets, mainly in theUnited States. Included in the Other segment are Mobile Solutions BusinessUnit (“MSBU”) and Custom Solutions Business Unit (“CSBU”).  On July 31, 2008, we sold MSBU which wasresponsible for the development, sales and service of our wireless IPCDMA/IPGSMproduct line. In the first quarter of 2009, we completed the wind-down of CSBUand the consolidation of voice messaging technology into our MultimediaCommunications segment. CSBU historically had been responsible for thedevelopment, sales and service of other non-core products. The consolidation ofvoice messaging technology into the Multimedia Communications segment did nothave a significant impact on segment net sales or gross profit. As a result ofthese changes we revised our internal reporting structure, operating segmentsand reporting segments.

 

Effective January 1,2009, the new reporting segments are as follows:

 

·                  Multimedia Communications—Focused ondevelopment and market opportunities in IPTV solutions and Wirelessinfrastructure technologies.

 

·                  Broadband Infrastructure—Focused on ourportfolio of broadband products.

 

·                  Handsets—Focused on mobile phone businesswith continued focus on the PAS and CDMA handset market, as well as data cardsmarkets.  Handset sales to PCD LLC,which commenced after the July 1, 2008 sale of PCD, are included inthis segment.

 

·                  Services—Focused on providing services andsupport of our Broadband Infrastructure and Multimedia Communicationsproduct lines.

 

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**NET SALES**

 
|                       |       |                                       |         |                                      |       |       |       |                |       |       |       |                |          |       |       |                |       |          |   |   |   |
|----------------------------|------------|--------------------------------------------|--------------|-------------------------------------------|------------|------------|------------|---------------------|------------|------------|------------|---------------------|---------------|------------|------------|---------------------|------------|---------------|--------|--------|--------|
| ** **                 | ** ** | **Three months  ended September 30,** | ** **   | **Nine months ended  September 30,** | ** ** |
| ** **                 | ** ** | **2009**                                   | ** **   | **% of net  sales**                       | ** ** | **2008**   | ** ** | **% of net  sales** | ** ** | **2009**   | ** ** | **% of net  sales** | ** **    | **2008**   | ** ** | **% of net  sales** | ** ** |
| ** **                 | ** ** | **(in thousands)**                         | ** **   |
| ***Net Sales by Segment*** |       |                                       |         |                                      |       |       |       |                |       |       |       |                |          |       |       |                |       |
| Multimedia Communications  |       | $                                          |  22,214 |                                      | 32         | %          | $          |  57,787        |       | 32         | %          | $                   |  95,215  |       | 35         | %                   | $          |  199,251 |   | 14     | %      |
| Broadband Infrastructure   |       | 16,092                                     |         | 23                                        | %          | 31,112     |       | 17                  | %          | 45,094     |       | 17                  | %             | 92,591     |       | 7                   | %          |
| Handsets                   |       | 15,614                                     |         | 22                                        | %          | 71,906     |       | 40                  | %          | 84,858     |       | 31                  | %             | 165,390    |       | 12                  | %          |
| Services                   |       | 16,584                                     |         | 23                                        | %          | 14,197     |       | 8                   | %          | 44,840     |       | 17                  | %             | 41,172     |       | 3                   | %          |
| PCD                        |       | —                                     |         | —                                    |       | —     |       | —              |       | —     |       | —              |          | 879,588    |       | 63                  | %          |
| Other                      |       | —                                     |         | —                                    |       | 5,605      |       | 3                   | %          | —     |       | —              |          | 21,360     |       | 1                   | %          |
|                       |       | $                                          |  70,504 |                                      | 100        | %          | $          |  180,607       |       | 100        | %          | $                   |  270,007 |       | 100        | %                   | $          | 1,399,352     |   | 100    | %      |
|                       |       |                                       |         |                                      |       |       |       |                |       |       |       |                |          |       |       |                |       |          |   |   |   |
| ** **                 | ** ** | **Three months ended September 30,**  | ** **   | **Nine months ended September 30,**  | ** ** |
| ** **                 | ** ** | ** **                                 | ** **   | **% of net**                              | ** ** | ** ** | ** ** | **% of net**        | ** ** | ** ** | ** ** | **% of net**        | ** **    | ** ** | ** ** | **% of net**        | ** ** |
| ** **                 | ** ** | **2009**                                   | ** **   | **sales**                                 | ** ** | **2008**   | ** ** | **sales**           | ** ** | **2009**   | ** ** | **sales**           | ** **    | **2008**   | ** ** | **sales**           | ** ** |
| ** **                 | ** ** | **(in thousands)**                         | ** **   |
| ***Net Sales by region***  |       |                                       |         |                                      |       |       |       |                |       |       |       |                |          |       |       |                |       |
| United States              |       | $                                          | 10,664       |                                      | 15         | %          | $          | 43,127              |       | 24         | %          | $                   | 53,654        |       | 20         | %                   | $          | 907,770       |   | 65     | %      |
| China                      |       | 30,959                                     |         | 44                                        | %          | 97,605     |       | 54                  | %          | 134,708    |       | 50                  | %             | 325,479    |       | 23                  | %          |
| India                      |       | 14,399                                     |         | 20                                        | %          | 8,002      |       | 4                   | %          | 33,519     |       | 12                  | %             | 20,838     |       | 2                   | %          |
| Other                      |       | 14,482                                     |         | 21                                        | %          | 31,873     |       | 18                  | %          | 48,126     |       | 18                  | %             | 145,265    |       | 10                  | %          |
| Total net sales            |       | $                                          | 70,504       |                                      | 100        | %          | $          | 180,607             |       | 100        | %          | $                   | 270,007       |       | 100        | %                   | $          | 1,399,352     |   | 100    | %      |
|                            |            |                                            |              |                                           |            |            |            |                     |            |            |            |                     |               |            |            |                     |            |               |        |        |        |  |

 

*Threemonths ended September 30, 2009 and 2008*

 

Net sales decreased by61% to $70.5 million during the three months ended September 30, 2009compared to the same period in 2008.  Thedecrease was primarily due to decrease in sales of all operating segmentsexcept the service segment. Multimedia Communications net sales decreased by$35.6 million, or 62%, for the three months ended September 30, 2009compared to the same period in 2008, mainly due to continued weakening demandfor our PAS Infrastructure products as well as decrease inNext Generation Network (“NGN”) sales. Broadband Infrastructure segment net sales decreasedby $15.0 million or 48% for the three months ended September 30, 2009compared to the same period in 2008 mainly due to decrease in sales of allmajor product lines.  Handsets segmentnet sales decreased by$56.3 million, or 78%, in the third quarter of 2009 primarily due to the declines of our PAS handsets sales inChina and CDMA handsets sales to PCD LLC, partiallyoffset by the increase of CDMA handsets sales in China during the three months ended September 30,2009.

 

*Nine months ended September 30, 2009 and 2008*

 

Net sales decreased by81% to $270.0 millionduring the nine months ended September 30, 2009 compared to the sameperiod in 2008. The decrease was primarily due to disposal of PCD and MSBU in2008 and disbandment of the operations formerly included in the Other segmentin the first quarter of 2009.  The PCDand Other segments accounted for $900.9 million of the decrease.  Net sales for the segments other than the PCDand Other decreased by $228.4 million or 46%. Multimedia Communications net sales decreased by $104.0 million, or 52%,for the nine months ended September 30, 2009 compared to the same periodin 2008, mainly due to continued weakening demand for our PAS Infrastructureproducts as well as decrease in NGN sales partially offset by increase of IPTVsystem and Set Top Box (“STB”) product sales. Broadband Infrastructure segment net sales decreasedby $47.5 million or 51% for the nine months ended September 30, 2009compared to the same period in 2008 mainly due to decrease in sales of allmajor product lines.  Handsets segmentnet sales decreased by $80.5 million, or 49%primarily due to the declines of our PAShandsets sales partially offset by the increase of CDMA handsetssales in China as well as to PCD LLC.

 

For additionaldiscussion, see the “Segment Reporting” section of this Item 2.

 

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In 2009 and beyond, weexpect a continued decline in demand for our PAS handsets and infrastructureequipment.  As of September 30, 2009, we have $205.0 million ofdeferred revenue associated with PAS infrastructure sales recognized ratablyover the expected period of support. We review assumptions regarding theestimated post contract support periods on a regular basis. Due to the Chinatelecommunication industry restructuring and launch of 3G services in China,the PAS services will be phased out by January 1, 2012. Consequently, wehave initiated certain actions which are expected to be completed in the fourthquarter of 2009 to determine the remaining period which the post contractsupport is expected to be provided.  We do not expect the total amount ofrevenue recognized over the life of contract to change, however, the remainingexpected period of support may be different from our estimates as of September 30,2009.

 

Theeconomic uncertainty that we are operating in today could adversely impact ourbusiness. However, the majority of our business is based in China and India—twocountries that are still projected to have economic growth in 2009.  We currently offer and have initial marketacceptance of our IPTV products in China, India, Taiwan and other geographicregions. We believe that the IPTV market presents a meaningful growthopportunity in these regions as well as other regions where we have targeted toexpand our IPTV offerings.

 

**GROSS(LOSS) PROFIT**

 
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | ** **                           | ** ** | **Gross**                           | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                           | ** ** | **2009**                             | ** ** | **profit %**                        | ** ** | **2008** | ** ** | **profit %** | ** ** | **2009** | ** ** | **profit %** | ** ** | **2008** | ** ** | **profit %** | ** ** |
| ** **                           | ** ** | **(in thousands)**                   | ** ** |
| ***Gross (Loss) Profit by Segment*** |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Multimedia  Communications           |       | $                                    | 10,122     |                                | 46         | % | $ | 30,846 |   | 53 | % | $ | 32,752 |   | 34 | % | $ | 92,820 |   | 47 | % |
| Broadband  Infrastructure            |       | 3,482                                |       | 22                                  | %          | 3,032 |   | 10 | % | 5,716 |   | 13 | % | 6,922 |   | 7 | % |
| Handsets                             |       | 3,322                                |       | 21                                  | %          | 14,965 |   | 21 | % | (24,597 | ) | (29 | )% | 37,961 |   | 23 | % |
| Services                             |       | 7,263                                |       | 44                                  | %          | 4,720 |   | 33 | % | 16,132 |   | 36 | % | 11,832 |   | 29 | % |
| PCD                                  |       | —                               |       | —                              |       | — |   | — |   | — |   | — |   | 69,005 |   | 8 | % |
| Other                                |       | —                               |       | —                              |       | 3,764 |   | 67 | % | — |   | — |   | 12,814 |   | 60 | % |
| Total                                |       | $                                    | 24,189     |                                | 34         | % | $ | 57,327 |   | 32 | % | $ | 30,003 |   | 11 | % | $ | 231,354 |   | 17 | % |

 

Cost of sales consistsprimarily of material and labor costs, including stock-based compensation,associated with manufacturing, assembly and testing of products, costsassociated with installation and customer training, warranty costs, fees toagents, inventory write-downs and overhead. Cost of sales also includes importtaxes and tariffs on components and assemblies. Some components and materialsused in our products are purchased from a single supplier or a limited group ofsuppliers and, in some cases, are subject to obtaining Chinese import permitsand approvals. We also rely on third party manufacturers to manufacture andassemble most of our CDMA handsets.

 

Our gross profit has beenaffected by average selling prices, material costs, product mix, the impact ofwarranty charges and contract loss provisions as well as inventory reserves andrelease of deferred revenues and related cost pertaining to prior years. Ourgross profit, as a percentage of net sales, varies among our product families.We expect that our overall gross profit, as a percentage of net sales, willfluctuate in the future as a result of shifts in product mix, stage of productlife cycle, anticipated decreases in average selling prices and our ability toreduce cost of sales.

 

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*Threemonths ended September 30, 2009 and 2008*

 

Gross profit was $24.2 million,or 34% of net sales, in the three months ended September 30, 2009,compared to $57.3 million, or 32% of net sales, in the correspondingperiod of 2008.  The decrease in absolutedollars was mainlydue to decrease in overall sales. The increase in gross profit aspercentage of net sales was primarily due to lower provision for anticipatedcontract losses and sales of certain handsets during the quarter which werepreviously reserved.

 

*Ninemonths ended September 30, 2009 and 2008*

 

Gross profit was$30.0 million, or 11% of net sales, for the nine months ended September 30,2009, compared to $231.4 million, or 17% of net sales, in thecorresponding period of 2008. The overall gross profit decrease in absolutedollars was primarily due to overall decrease in sales and the disposal of PCDand MSBU in 2008 and disbandment of the operations formerly included in the Other segment in the first quarter of2009.  PCD and Other segments inaggregate accounted for $81.8 million decrease in gross profit for the nine monthsended September 30, 2009.  Grossprofit for the segments other than PCD and Other decreased by $119.5 million for the nine months ended September 30,2009 as compared to the corresponding period of 2008.  This decrease was primarily due to decreasein sales, additional inventory reserves and claim settlementrelated to certain handsets sold to PCD LLC for the Handsets segments, and decrease in sales ofhigher margin Multimedia Communications products during the nine months ended September 30,2009, partially offset by an $8.5 million decrease to cost of sales in theHandsets segment resulting from the amortization of the Marvell supplyagreement during the first quarter of 2009 (See Note 3 of Notes to ourCondensed Consolidated Financial Statements included under Part I, Item 1of this Quarterly Report on Form 10-Q.)

 

For additionaldiscussion, see “Segment Reporting” section of this Item 2.

 

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**OPERATINGEXPENSES**

 

The following tablesummarizes our operating expenses:

 
| ** **                          | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                   | ** ** | **% of  net  sales**                      | ** ** | **2008** | ** ** | **% of  net  sales** | ** ** | **2009** | ** ** | **% of  net  sales** | ** ** | **2008** | ** ** | **% of  net  sales** | ** ** |
| ** **                          | ** ** | **(in thousands)**                         | ** ** |
| Selling, general and administrative |       | $                                          | 33,139     |                                      | 47         | % | $ | 59,445 |   | 33 | % | $ | 114,290 |   | 42 | % | $ | 211,199 |   | 15 | % |
| Research and development            |       | 14,246                                     |       | 20                                        | %          | 35,971 |   | 20 | % | 51,983 |   | 19 | % | 116,657 |   | 8 | % |
| Amortization of intangible assets   |       | —                                     |       | —                                    |       | 279 |   | 0 | % | — |   | — |   | 3,833 |   | 0 | % |
| Restructuring                       |       | 8,909                                      |       | 13                                        | %          | — |   | — |   | 41,485 |   | 16 | % | — |   | — |   |
| Loss (gain) on divestiture          |       | 1,689                                      |       | 2                                         | %          | (3,455 | ) | -2 | % | 332 |   | 0 | % | (3,455 | ) | 0 | % |
| Total net operating expenses        |       | $                                          | 57,983     |                                      | 82         | % | $ | 92,240 |   | 51 | % | $ | 208,090 |   | 77 | % | $ | 328,234 |   | 23 | % |
|                                     |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Selling, general andadministrative expenses (“SG&A”) include compensation and benefits,professional fees, sales commissions, provision for doubtful accountsreceivable and travel and entertainment costs. Research and development (“R&D”)expenses consist primarily of compensation and benefits of employees engaged inresearch, design and development activities, costs of parts for prototypes,equipment depreciation and third party development expenses. We believe thatcontinued and prudent investment in research and development is critical to ourlong-term success, and we will aggressively evaluate appropriate investmentlevels.  A portion of our costs are fixedand are difficult to quickly reduce in periods of lower sales.

 

*SELLING,GENERAL AND ADMINISTRATIVE*

 

*Three months ended September 30,2009 and 2008*

 

SG&A expenses were $33.1 million for the three months ended September 30,2009, a decrease of $26.3 million as compared to $59.4 million for thesame period in 2008. The decrease in SG&A expense was primarily due to a $15.9 million decrease in personnel relatedexpenses due to continuous streamlining of operations and recent cost reductionmeasures, a $2.7 million decrease in depreciation expense due to assetsimpairment write off in 2008, a $2.8 million decrease in travel relatedexpenses due to reduced travel activity and cost containment efforts, a $2.7 million savings from reduction in theuse of outside services, a $3.5 million savings from legal andaccounting fees, a $1.0 million reduction in advertising andmarketing, sales promotions, as well as shows and exhibits expenses due toreduced sales activities; and a $1.6 million recovery of doubtful account asa result of continued efforts in collection compared to $2.6 million recovery of doubtful account inthe same period of 2008. The decrease in SG&A expenses was also partiallyoffset by a $2.4 million of acquired license amortization expense during thequarter.

 

*Nine months ended September 30,2009 and 2008*

 

SG&A expenses were $114.3 million for the nine months ended September 30,2009, a decrease of $96.9 million as compared to $211.2 million for the sameperiod in 2008. The decrease in SG&A expense was primarily due to a $14.6 million decrease in SG&A expensesrelated to divested operations, primarily PCD and MSBU, a $34.6 million decrease in personnel relatedexpenses due to continuous streamlining of operations and recent cost reductionmeasures, a $12.9 million reduction in legal and accounting fees as aresult of reduced activity in investigations and litigation, a $7.6 million decrease in depreciation expensedue to assets impairment write off in 2008, an $8.2 million savings from reduction in theuse of outside services, a $6.5 million decrease in travel related expenses due toreduced travel activity and cost containment efforts, a $4.4 million reduction in advertising andmarketing, sales promotions, as well as shows and exhibits expenses due toreduced sales activities, and a $3.8 million recovery of doubtful accountcompared to $0.1 million provision of doubtful accounts in the sameperiod of 2008. The decrease in SG&A expenses was also partially offset bya $2.4 million of acquired license amortization expense during the thirdquarter of 2009.

 

*RESEARCHAND DEVELOPMENT*

 

*Threemonths ended September 30, 2009 and 2008*

 

R&D expensesdecreased by $21.7 million during the three months ended September 30,2009 compared to the same period in 2008. The decreasewas primarily dueto a $0.9M decrease in R&D expenses related to the MSBU operations soldin July 2008, a 

 

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$12.4 million decrease in personnel relatedexpenses as we continued to streamline our R&D operations and reducedspending in non-core business units, a $3.9 millionsavings from reduction in use of outside servicesmainly due to wind-down of the Korea operations, a $1.3 million decrease in travel related expenses due to reduced travelactivity,a $1.2 million decrease in facility relatedexpense , a $0.8 million decrease in depreciation and a $1.4 million decreasein software license and parts expense as we continued to streamline ouroperations.

 

*Ninemonths ended September 30, 2009 and 2008*

 

R&D expensesdecreased by $64.7 million during the nine months ended September 30,2009 compared to the same period in 2008. In July 2008, we sold PCD and MSBU which resulted in aggregatedR&D savings of $10.3 millionfor the nine months ended September 30, 2009.  Inaddition, the decrease was also due to a $34.1 million decrease in personnel relatedexpenses as we continued to streamline our R&D operations and reducedspending in non-core business units, a $8.8 millionsavings from reduction in use of outside services primarily due to wind-down ofthe Korea operation, a $3.2 milliondecrease in travelrelated expenses due to reduced travel activity, a $2.9 million decrease in facility related expense, a $2.2 million decrease in depreciation and a$3.8 million decrease in software license and parts expenses as wecontinued to streamline our operations.

 

*AMORTIZATIONOF INTANGIBLE ASSETS*

 

*Threemonths and nine months ended September 30, 2009 and 2008*

 

There was no amortizationof intangible assets in the three and nine months ended September 30, 2009compared to $0.3 million and $3.8 million in the three and nine monthsended September 30, 2008, respectively. An impairment charge of $4.9million was recorded in the fourth quarter of 2008 to fully write-off the remainingcarrying value of intangible assets at December 31, 2008.

 

*RESTRUCTURING*

 

Forthe three and nine months ended September 30,2009, we recorded restructuring charges of $8.9 million and $41.5 million,respectively.  No restructuring chargeswere recorded in the comparable periods in 2008. We expect to incuradditional restructuring charges aswe continue to execute the 2009 and 2008 Restructuring Plans.  The following describes our restructuringinitiatives.

 

*2009 Restructuring Plan*

 

On June 9, 2009, ourBoard of Directors approved a restructuring plan (the “2009 Restructuring Plan”)designed to reduce our operating costs.  The 2009 Restructuring Planincludes a worldwide reduction in force of approximately 50% of our headcount,or approximately 2,300 employees located primarily in China and theUnited States and, to a lesser degree, other international locations.   During the three and ninemonths ended September 30, 2009, we recorded restructuring costs ofapproximately $9.2 million and $35.1 million, respectively, relatedto the 2009 Restructuring Plan. Restructuring costs for the nine months ended September 30, 2009included $33.6 million forseverance and benefits related to approximately 2,070 employees and $1.5 million related primarily to theestimated loss on a lease obligation which expires in 2013.

 

*2008 Restructuring Plan*

 

During fiscal 2008, we implemented arestructuring plan (the “2008 Restructuring Plan”) and recorded $13.1 millionin restructuring charges primarily related to a global reduction in forceacross all functions and employee terminations at certain non-core operationswhich we are in the process of winding down. The total number ofemployees affected totaled approximately 750, including 350 in China,200 in Korea and 200 in other locations including theUnited States. The charges forthe nine months ended September 30, 2009 consist primarily of severanceand benefits related to the transition of certain key functions, includingfinance, to China and the divestiture of our Korea operations and lease costsrelated to a lease obligation which expires in fiscal year 2010.

 

*2007 Restructuring Plan*

 

At September 30, 2009 the restructuring accrual for the 2007 Planincluded within other liabilities of approximately $0.5 million was related toa lease obligation which expires in fiscal year 2010.

 

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The activity inthe accrued restructuring balances related to the plans described above was asfollows for the nine months ended September 30, 2009:

 
| ** **                            | ** ** | **Balance at  December 31,  2008** | ** ** | **Restructuring  Charges** | ** ** | **Cash Payments** | ** ** | **Non-cash  Settlement** | ** ** | **Balance at  September 30, 2009** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|----------------------------|------------|-------------------|------------|--------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **(in thousands)**                      | ** ** |
| 2009 Restructuring Plan               |       |                                    |       |                       |       |              |       |                     |       |                                         |       |
| Workforce Reduction                   |       | $                                       | —     |                       | $          | 33,620            |       | $                        | (13,542    | )                                            | $          | (1,569 | ) | $ | 18,509 |   |
| Lease Costs                           |       | —                                  |       | 1,516                      |       | (215              | )          | **—**               |       | 1,301                                        |       |
| Other Costs                           |       | —                                  |       | 7                          |       | (7                | )          | —                   |       | —                                       |       |
| Total 2009 Restructuring Plan         |       | —                                  |       | 35,143                     |       | (13,764           | )          | (1,569                   | )          | 19,810                                       |       |
| 2008 Restructuring Plan               |       |                                    |       |                       |       |              |       |                     |       |                                         |       |
| Workforce Reduction                   |       | 7,976                                   |       | 5,189                      |       | (9,278            | )          | (880                     | )          | 3,007                                        |       |
| Lease Costs                           |       | 249                                     |       | 1,075                      |       | (703              | )          | **—**               |       | 621                                          |       |
| Other Costs                           |       | 498                                     |       | (126                       | )          | (314              | )          | —                   |       | 58                                           |       |
| Total 2008 Restructuring Plan         |       | 8,723                                   |       | 6,138                      |       | (10,295           | )          | (880                     | )          | 3,686                                        |       |
|                                  |       |                                    |       |                       |       |              |       |                     |       |                                         |       |
| 2007 Restructuring Plan - Lease Costs |       | 788                                     |       | 204                        |       | (504              | )          | —                   |       | 488                                          |       |
|                                  |       |                                    |       |                       |       |              |       |                     |       | —                                       |       |
| Total                                 |       | $                                       | 9,511      |                       | $          | 41,485            |       | $                        | (24,563    | )                                            | $          | (2,449 | ) | $ | 23,984 |   |

 

The following table showsthe total amount of costs incurred by segment in connection with therestructuring plans:

 
| ** **                           | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                   | ** ** | **2009**                                  | ** ** |
| ** **                           | ** ** | **(in thousands)**                         | ** ** |
| Multimedia Communications            |       | $                                          | 15         |                                      | $          | 5,482 |   |
| Broadband Infrastructure             |       | (777                                       | )          | 2,503                                     |       |
| Handsets                             |       | 1,314                                      |       | 3,079                                     |       |
| Services                             |       | 2,456                                      |       | 5,919                                     |       |
| Total restructuring costs by segment |       | 3,008                                      |       | 16,983                                    |       |
| General and Corporate                |       | 5,901                                      |       | 24,502                                    |       |
| Total restructuring costs            |       | $                                          | 8,909      |                                      | $          | 41,485 |   |

 

The majority of theremaining cash expenditures related to the 2009 and 2008 Restructuring Plansare expected to be paid in the next two quarters, with lesser amounts expectedto be paid in the remainder of 2010.  Theremaining liabilities related to lease obligations are expected to be settledover the remaining lease term.

 

*LOSS (GAIN) ON DIVESTITURE*

 

*Threemonths and nine months ended September 30, 2009 and 2008*

 

Losson divestiture for the three months ended September 30, 2009 is comprisedof a $1.7 million loss from the divestiture of our Korea operations. The losson divestiture of $0.3 million for the nine months ended September 30,2009 is comprised of the $1.7 million loss from the divestiture of our Koreaoperations, offset partially by a $1.4 million gain on saleof PCD assets resulting from an adjustment to reflect actualtransaction-related costs. The $3.5 million net gain on divestitures for the three and ninemonths ended September 30, 2008 included a $0.5 million loss on the saleof PCD and a $3.9 million gain on the sale of MSBU.

 

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**OTHER INCOME (EXPENSE)**

 

*INTERESTINCOME*

 

*Threemonths and nine months ended September 30, 2009 and 2008*

 

Interest income was$0.5 million and $2.1 million for the three months ended September 30,2009 and 2008, respectively. Interest income was $1.8 million and $6.3million for the nine months ended September 30, 2009 and 2008,respectively. Interest income decreased in the three and nine months ended September 30,2009 compared to the same periods in 2008 due to the effect of lower averagecash balances in 2009 and due to a decline in the average interest rate.

 

*INTERESTEXPENSE*

 

*Threemonths and nine months ended September 30, 2009 and 2008*

 

Interest expense was lessthan $0.1 million and $0.4 million for the three months ended September 30,2009 and 2008, respectively. Interest expense was $0.5 million and $10.0million for the nine months ended September 30, 2009 and 2008,respectively. The decrease in interest expense for the three and nine monthsended September 30, 2009 compared to the same period in 2008 was primarilyattributable to the repayment of $274.6 million of convertible subordinatednotes due March 1, 2008 and $48.0 million of other bank loan repaymentsduring 2008. Interest expense for the nine months ended September 30, 2008included approximately $2.5 million of debt issuance costs related to a securedrevolving credit facility.

 

*OTHERINCOME (EXPENSE), NET*

 

*Threemonths ended September 30, 2009 and 2008*

 

Other expense, net was$1.6 million for the three months ended September 30, 2009 ascompared to other expense, net of $14.9 million for the three months endedSeptember 30, 2008.  Other expense,net of $1.6 million for the three months ended September 30, 2009consisted primarily of a $1.7 million other-than-temporary impairment of anequity investment. Other expense, net of $14.9 million for the three monthsended September 30, 2008 consisted primarily of $10.6 million foreigncurrency losses and a $4.3 million charge for other-than-temporary impairmentof two long-term equity investments. The foreign currency losses primarilyconsisted of losses attributed to the appreciation of the US dollar on theIndian Rupee denominated intercompany receivables, partially offset by gainsfor our China subsidiaries attributed to the appreciation of the ChineseRenminbi on US dollar denominated intercompany payables.

 

*Ninemonths ended September 30, 2009 and 2008*

 

Other expense, net forthe nine months ended September 30, 2009 was $3.3 million as compared toincome of $38.1 million for the nine months ended September 30, 2008.Other expense, net for the nine months ended September 30, 2009 consistedprimarily of a $5.5 million other-than-temporary impairment of two equityinvestments, offset partially by foreign currency gains of $1.7 millionand $0.5 million of other immaterial items. Other income for the nine monthsended September 30, 2008 consisted primarily of a $32.4 million gain onthe sale of the Gemdale investment, a $7.3 million gain on the sale of theInfinera investment, an $8.2 million gain on the liquidation of an investmentin a variable interest entity, offset partially by a $6.4 million foreigncurrency loss and a $4.3 million charge for other-than-temporary impairment oftwo long-term equity investments.

 

*INCOMETAX EXPENSE*

 

Income tax expense isbased upon a blended effective tax rate based upon our expectation of theamount of income to be earned in each tax jurisdiction and is accounted underthe liability method. Deferred income taxes are recognized for the differencesbetween the tax bases of assets and liabilities and their financial statementamounts based on enacted tax rates. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realized.We expect to maintain a full valuation allowance on our remaining net deferredtax assets until an appropriate level of profitability that generates taxableincome is sustained or until we are able to develop tax strategies that wouldenable us to conclude that it is more likely than not that a portion of ourdeferred tax assets will be realizable. Any reversal of valuation allowanceswill favorably impact our results of operations in the period of the reversal.

 

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FASB ASC 740-10establishes criteria for recognizing or continuing to recognize onlymore-likely-than-not tax positions, which may result in income tax expensevolatility in future periods. While we believe that we have adequately providedfor all tax positions, amounts asserted by taxing authorities could be greaterthan our accrued position. Accordingly, additional provisions on income taxrelated matters could be recorded in the future as revised estimates are madeor the underlying matters are settled or otherwise resolved.

 

*Threemonths ended September 30, 2009 and 2008*

 

Income tax benefit was $0.3million for the three months ended September 30, 2009 compared to a taxexpense of $7.8 million for the three months ended September 30, 2008.

 

*Nine months ended September 30,2009 and 2008*

 

Income tax expense was$6.2 million for the nine months ended September 30, 2009 compared to atax expense of $7.4 million for the nine months ended September 30, 2008. During thesecond quarter of 2009, we made an assessment of the realizability of ourdeferred tax assets in Korea, which are included in our Handsets segment, andwe believe that it will not generate sufficient income to realize its deferredtax assets in Korea.  Therefore, weestablished a valuation allowance on our remaining net deferred tax assets inKorea.  The income tax expense associatedwith establishing the valuation allowance is $1.4 million. Income tax expense for the nine monthsended September 30, 2009 also included a first quarter tax benefit of $2.8million related to the recognition of previously unrecognized tax benefits andthe reversal of interest and penalties due to statute of limitationsexpirations and income tax audit settlements. The China Corporate Income TaxLaw (“CIT Law”) was effective on January 1, 2008.  As a result of the enactment of regulationsduring the nine months ended September 30, 2008, we recorded an income taxbenefit of $11.7 million related to reversing a deferred tax liability onforeign withholding taxes related to the unremitted earnings of oursubsidiaries which we determined to not be permanently reinvested outside theUnited States.  We also accrued $3.2million of foreign withholding taxes related to the realized gain on the saleof our investment in Gemdale.

 

In the third quarter of2008, due to the sale of PCD, we believed that we would not generate sufficientincome in Canada to realize our deferred tax assets in Canada. Therefore, weestablished a valuation allowance on our remaining net deferred tax assets inCanada. The income tax expense associated with establishing the valuationallowance was $1.8 million.

 

For 2009 and 2008, wehave not provided any tax benefit on any forecasted losses incurred and taxcredits generated in the United States and other countries, because we believethat it is more likely than not that the tax benefit associated with theselosses will not be realized. Also, for 2009 and 2008, we continue to accrue taxexpense in jurisdictions where we have been historically profitable. Estimatesof the annual effective tax rate at the end of the interim periods are based onevaluations of possible future events and transactions and may be subject tosubsequent refinement or revision.

 

**SEGMENTREPORTING**

 

Summarized below are oursegment net sales revenue and gross profit for the three and nine months ended September 30,2009 and 2008, respectively.

 

***MultimediaCommunications***

*** ***
| ** **                                | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**                         | ** ** |
| Net sales                                 |       | $                                          | 22,214     |                                      | $          | 57,787 |   | $ | 95,215 |   | $ | 199,251 |   |
| Gross profit                              |       | $                                          | 10,122     |                                      | $          | 30,846 |   | $ | 32,752 |   | $ | 92,820 |   |
| Gross profit as a percentage of net sales |       | 46                                         | %          | 53                                        | %          | 34 | % | 47 | % |

 

During the three monthsended September 30, 2009, sales of Multimedia Communications segmentdecreased by 62% or $35.6 million as compared to the same period in 2008.  The decrease was primarily due to thedecrease in PAS equipment sales by 90% as well as decrease in sales of NGNproduct.  PAS equipment sales comprised approximately 13% and50% of our Multimedia Communications sales for the three months ended September 30,2009 and 2008, respectively.

 

Sales for the nine monthsended September 30, 2009 decreased by 52% or $104.0million. The decrease was mainly due to the declines of our PAS equipment salesby 83% as well as decrease in sales ofNGN product partially offset byincrease in sales of IPTV system and STB products. PAS equipment sales comprised approximately 22% and63% of our Multimedia Communications sales for the nine months ended September 30,2009 and 2008, respectively.

 

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The gross profitpercentage decreased to 46% and 34% for the three and nine months ended September 30,2009 from 53% and 47%, respectively, for the corresponding periods in 2008.During the three and nine months ended September 30, 2008 gross profitbenefited $4.5 million from the impact of the release of accrued third partycommissions, compared with $0.7 million and $0.8 million, respectively, duringthe three and nine months ended September 30, 2009, The decrease in grossprofit percentage was also due to decreased sales of our higher margin PASinfrastructure equipment and NGN product.

 

Weexpect future PAS infrastructure spending to decline rapidly in 2009 and beyondas China launched its 3G networks.We plan to aggressively pursue opportunities for our IPTV productportfolios in multiple markets. However, we do not anticipate that these saleswill fully offset the anticipated decline in PAS sales in 2009 and beyond.  We believe that the IPTV market presents ameaningful growth opportunity. We currently offer and have initial marketacceptance of our IPTV products in China, India, Taiwan and other geographicregions.

 

***BroadbandInfrastructure***

*** ***
| ** **                                | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**                         | ** ** |
| Net sales                                 |       | $                                          | 16,092     |                                      | $          | 31,112 |   | $ | 45,094 |   | $ | 92,591 |   |
| Gross profit                              |       | $                                          | 3,482      |                                      | $          | 3,032 |   | $ | 5,716 |   | $ | 6,922 |   |
| Gross profit as a percentage of net sales |       | 22                                         | %          | 10                                        | %          | 13 | % | 7 | % |

 

Broadband Infrastructuresales decreased by 48%, or $15.0 million and 51%, or $47.5, million respectively, during the three and ninemonths ended September 30, 2009, respectively, as compared to the sameperiods in 2008.  The decrease was mainlydue to decrease in sales of all major product lines in 2009.  Softbank in Japan, one of our largestinfrastructure customers, represented approximately 10% and 21% of totalBroadband sales during the three months ended September 30, 2009 and 2008,respectively and 13% and 24% during the nine months ended September 30,2009 and 2008, respectively.

 

Gross profit percentageincreased to 22% and 13% for the three and nine months ended September 30, 2009 from10% and 7%, respectively, for the corresponding periods of 2008. The increase in gross profitpercentage was primarily due to higher provision foranticipated contract losses in 2008 compared to 2009.

 

We may incur additionalwarranty expense and inventory reserves as we introduce new products and may berequired to accrue additional contract losses for certain fixed price contractsas these contracts progress. These accruals may result in negative impacts onour future gross margins, results of operations and financial position.

 

***Handsets***

*** ***
| ** **                                       | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                   | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                         | ** ** |
| Net sales                                        |       | $                                          | 15,614     |                                     | $          | 71,906 |   | $ | 84,858 |   | $ | 165,390 |   |
| Gross (loss) profit                              |       | $                                          | 3,322      |                                     | $          | 14,965 |   | $ | (24,597 | ) | $ | 37,961 |   |
| Gross (loss) profit as a percentage of net sales |       | 21                                         | %          | 21                                       | %          | (29 | )% | 23 | % |

 

Net sales decreased by 78%, or $56.3 million for the three months ended September 30,2009 compared to the same period in 2008. The decrease wasprimarily due to the declines of PAS business in China and CMDA salesto PCD LLC, partiallyoffset by the increase of CDMA sales in China during the quarter.  The sale of PAS handsets accounted for 18%and 46% of total handset sales for the three months ended September 30,2009 and 2008, respectively.

 

Net sales decreased by 49%, or $80.5 million for the nine months ended September 30,2009 compared to the same periods in 2008. The decrease wasprimarily due to the declines of PAS business in China partially offset by theincrease of CDMA sales in China and to PCD LLC. The sale of PAS handsets accounted for 26% and 70% of total handsetsales for the nine months ended September 30, 2009 and 2008,respectively.  Our PAS handset salesdeclined significantly since the first quarter of 2009 as China moved towardthe 3G network deployment.

 

Gross profit as apercentage of net sales remained unchanged for the three months ended September 30,2009 and 2008. The gross profit for the three month ended September 30,2009 benefited $6.5 million from the sales of CDMA handsets to PCD LLC duringthe quarter that were fully reserved in the fourth quarter of 2008. Thisbenefit to gross profit was offset by additional inventory reserves and theweakening demand for our PAS products.

 

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Gross profit as apercentage of net sales decreased from 23% for the nine months ended September 30,2008 to negative 29% for the corresponding period in 2009. The decrease was mainlydue to inventory clearing sales of PAS and CDMA handsets at very low margins,additional inventory reserves of PAS, CDMA and TDSCDMA handsets in China. In addition, gross profit was also reduced by approximately $26.2 million as a result of transactions withPCD LLC consisting of a claim settlement of $11.1 million forproduct-related liability disputes and product returns and $15.1 million of costs for inventorywrite-downs to net realizable value, write-downs of excess inventory andwarranty reserves.

 

In 2009 and beyond, we expect an accelerated decline in PAS subscribersas the China telecommunication industry reorganizes and launches 3G servicesand phases out PAS services.

 

***Services***

*** ***
| ** **                                | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**                         | ** ** |
| Net sales                                 |       | $                                          | 16,584     |                                      | $          | 14,197 |   | $ | 44,840 |   | $ | 41,172 |   |
| Gross profit                              |       | $                                          | 7,263      |                                      | $          | 4,720 |   | $ | 16,132 |   | $ | 11,832 |   |
| Gross profit as a percentage of net sales |       | 44                                         | %          | 33                                        | %          | 36 | % | 29 | % |

 

Our Services segment’srevenue increased by 17%, or $2.4 million and 9%,or $3.7 million for the three and nine months ended September 30, 2009,respectively as compared to the corresponding periods in 2008. The increasewas primarily due to higher international maintenance service revenue partiallyoffset by the decrease in China service sales after the China telecommunications industry restructuring.

 

Gross profit as apercentage of net sales increased from 33% and 29% for the three and ninemonths ended September 30, 2008, respectively, to 44% and 36% for the corresponding periods in 2009,respectively.  The increase in grossprofit in absolute dollars was primarily due to increased internationalsales and overallcost reduction efforts for the service divisions.

 

***Personal Communication Devices (PCD)***

*** ***
| ** **                                | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**                         | ** ** |
| Net sales                                 |       | $                                          | —     |                                      | $          | — |   | $ | — |   | $ | 879,588 |   |
| Gross profit                              |       | $                                          | —     |                                      | $          | — |   | $ | — |   | $ | 69,005 |   |
| Gross profit as a percentage of net sales |       | —                                     |       | —                                    |       | — |   | 8 | % |

 

On July 1, 2008, wesold our PCD operations (See Note 3 of Notes to our Condensed ConsolidatedFinancial Statements included under Part I, Item 1 of this QuarterlyReport on Form 10-Q).

 

***Other***

*** ***
| ** **                                | ** ** | **Three months  ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**                         | ** ** |
| Net sales                                 |       | $                                          | —     |                                      | $          | 5,605 |   | $ | — |   | $ | 21,360 |   |
| Gross profit                              |       | $                                          | —     |                                      | $          | 3,764 |   | $ | — |   | $ | 12,814 |   |
| Gross profit as a percentage of net sales |       | —                                     |       | 67                                        | %          | — |   | 60 | % |

 

OurOther segment consists of Mobile Solutions (“MSBU”) and Custom Solutions (“CSBU”)business units.  We disposed of our MSBU unit in July 2008and completed the disbandment of the CSBU unit in the first quarter of2009.  The remaining IP Messaging productline has been integrated into the Multimedia Communication segment andremaining services related contracts have been integrated into the Servicesegment.

 

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**RELATEDPARTY TRANSACTIONS**

 

*Softbankand affiliates*

 

We recognize revenue withrespect to sales of telecommunications equipment to affiliates of Softbank, asignificant stockholder of the Company. Softbank offers ADSL coveragethroughout Japan, which is marketed under the name “YAHOO! BB.” We supportSoftbank’s fiber-to-the-home service through sales of our carrier class GEPONproduct as well as our NetRingÔ product. In addition, we supportSoftbank’s new internet protocol television (“IPTV”), through sales of ourRollingStreamÔ product. We recognized revenue for salesof telecommunications equipment and services to affiliates of Softbank of$4.8  million and $9.7 million,respectively, during the three months ended September 30, 2009 and 2008,and $16.0 million and $30.9 million, respectively, during the nine months endedSeptember 30, 2009 and 2008.

 

Included in accountsreceivable at September 30, 2009 and December 31, 2008 were $4.5million and $9.2 million, respectively, related to these transactions. Wehad immaterial amounts of accounts payable to Softbank and its affiliates at September 30,2009 and December 31, 2008.

 

Sales to Softbank includea three year service period and a penalty clause if product failure ratesexceed a certain level over a seven year period. As of September 30, 2009and December 31, 2008, our customer advance balance related to Softbankagreements was $0.2 million and $0.7 million, respectively.  The current deferred revenue balance relatedto Softbank was $1.5 million and $4.0 million as of September 30, 2009 andDecember 31, 2008, respectively.  Asof September 30, 2009, our noncurrent deferred revenue balance related toSoftbank was $8.8 million compared to $9.2 million as of December 31,2008.

 

As of September 30,2009, Softbank beneficially owned approximately 11% of our outstanding stock.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**Liquidity and Capital Resources**

 

The following sections discuss the effects ofchanges in our balance sheet and cash flows, contractual obligations and othercommitments on our liquidity and capital resources.

 

***Balance Sheet and Cash Flows***

 

Cashand Cash Equivalents and Short-term Investments

 
| ** **                                                    | ** ** | **September 30,**                        | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                                    | ** ** | **2009**                                      | ** ** | **2008**              | ** ** | **Change** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                            | ** ** |
|                                                          |       |                                          |       |                  |       |       |       |
| Cash and cash equivalents                                     |       | $                                             | 237,112    |                  | $          | 309,603    |       | $ | (72,491 | ) |
| Short-term investments                                        |       | 4,544                                         |       | 4,262                 |       | 282        |       |
| Total                                                         |       | $                                             | 241,656    |                  | $          | 313,865    |       | $ | (72,209 | ) |
| ** **                                                    | ** ** | ** **                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Nine months ended September 30,** | ** ** |
| ** **                                                    | ** ** | **2009**                                      | ** ** | **2008**              | ** ** | **Change** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                            | ** ** |
| Cash used in operating activities                             |       | $                                             | (89,202    | )                     | $          | (31,872    | )          | $ | (57,330 | ) |
| Cash provided by investing activities                         |       | 14,900                                        |       | 245,684               |       | (230,784   | )          |
| Cash used in financing activities                             |       | (388                                          | )          | (333,224              | )          | 332,836    |       |
| Effect of exchange rate changes on cash and cash  equivalents |       | 2,199                                         |       | 10,932                |       | (8,733     | )          |
| Net decrease in cash and cash equivalents                     |       | $                                             | (72,491    | )                     | $          | (108,480   | )          | $ | 35,989 |   |

 

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Cash and cash equivalents, consistingprimarily of bank deposits and money market funds, are recorded at cost whichapproximates fair value because of the short-term nature of theseinstruments. At September 30,2009, cash and cash equivalents approximating $91.3 million was held by oursubsidiaries in China.

 

Cash used in operating activities during the ninemonths ended September 30, 2009 of $89.2 million resulted primarily fromthe net loss of $186.3 million offset by non-cash charges including $10.2million of depreciation and amortization, $9.4 million stock-basedcompensation, $5.5 million other-than-temporary impairment of two equityinvestments and also offset by changes in operating assets and liabilitiesproviding net cash of $73.6 million.  Thedecrease in sales activity in the first nine months of 2009 was the primarydriver of the changes in operating assets and liabilities.  Cash from operations benefited by $108.9million from a decrease in accounts receivable, $40.5 million from a decreasein inventory and deferred costs, $62.4 million from a decrease in other assetsconsisting primarily of working capital items, and $41.1 million from anincrease in customer advances, offset partially by a decrease in accountspayable using cash of $132.0 million, a decrease in deferred revenue of $33.8million and a decrease in other liabilities of $15.8 million. Cash used inoperating activities during the nine months ended September 30, 2008 of$31.9 million resulted primarily from the net loss of $69.9 million adjustedfor gains on sale of investments of $40.2 million, the $8.2 million gain onliquidation of ownership interest in a variable interest entity, the $3.5million gain on divestitures and non-cash charges of $41.1 million, whichresulted in a net use of cash of $80.6 million. The non-cash charges of $41.1million included $30.6 million in depreciation and amortization, $13.9 millionin stock-based compensation expense and $4.3 million impairment of long-terminvestments,  partially offset by adeferred tax benefit of $7.9 million. The deferred tax benefit is primarily due to an $11.7 million benefitresulting from a change in the China Corporate Income Tax Law, offset partiallyby $1.9 million of expense related to placing a valuation allowance on ourCanadian deferred tax assets. Changes in net operating assets and liabilitiesproviding net cash of $48.7 million, which was primarily the result ofmanagement of working capital, in part necessitated by the repayment of theconvertible subordinated notes due March 1, 2008.

 

Cash provided by investing activities during thenine months ended September 30, 2009 and 2008 was $14.9 millionand $245.7 million, respectively. Cash provided from investing activities inthe nine months ended September 30, 2009 included $10.0 million of cashproceeds released from escrow in July 2009 related to sale of PCD, $1.6million of cash proceeds from the sale of our investment in PCD LLC and $1.5million cash proceeds from the divestiture of our Korea operations. Net cash provided by investing activitiesfor the nine months ended September 30, 2008 of $245.7 million included approximately $207.1million in net proceeds from the sale of PCD and MSBU, $53.7 million netproceeds from the sale of investments, net of purchases, and $7.7 million fromthe repayment of a loan by a variable interest entity, partially offset by$12.7 million used to purchase property, plant and equipment and a $10.4million change in restricted cash.

 

Cash used in financingwas $0.4 million during the nine months ended September 30, 2009. Cashused in financing activities during the nine months ended September 30,2008 of $333.2 million related primarily to the repayment of the convertiblesubordinated notes of $274.6 million on March 1, 2008 and the netrepayment of $48.0 million of other bank loans during 2008.

 

Accounts Receivable, Net

 

The followingtable summarizes our accounts receivable, net (in thousands):

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                           | ** ** | **2009**               | ** ** | **2008**              | ** ** | **(Decrease)** | ** ** |
| ** **                           | ** ** | **(in thousands)**     | ** ** |
|                                 |       |                   |       |                  |       |           |       |
| Accounts receivable, net             |       | $                      | 49,242     |                  | $          | 149,210        |       | $ | (99,968 | ) |
| Accounts receivable, related parties |       | 4,472                  |       | 9,166                 |       | (4,694         | )          |
| Total accounts receivable            |       | $                      | 53,714     |                  | $          | 158,376        |       | $ | (104,662 | ) |

 

Accounts receivable decreased $104.7 millionprimarily due to the decrease in sales in the first nine months of 2009.

 

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Inventories andDeferred Costs

 

The followingtable summarizes our inventories and deferred costs:

 
| ** **                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                | ** ** | **2009**               | ** ** | **2008**              | ** ** | **(Decrease)** | ** ** |
| ** **                | ** ** | **(in thousands)**     | ** ** |
| Inventories:              |       |                   |       |                  |       |           |       |
| Raw materials             |       | $                      | 8,955      |                  | $          | 15,545         |       | $ | (6,590 | ) |
| Work in-process           |       | 12,424                 |       | 33,524                |       | (21,100        | )          |
| Finished goods            |       | 146,073                |       | 140,763               |       | 5,310          |       |
| Total inventories         |       | $                      | 167,452    |                  | $          | 189,832        |       | $ | (22,380 | ) |
|                      |       |                   |       |                  |       |           |       |
| Short-term deferred costs |       | $                      | 114,864    |                  | $          | 114,884        |       | $ | (20 | ) |
| Long-term deferred costs  |       | $                      | 134,013    |                  | $          | 149,258        |       | $ | (15,245 | ) |

 

Inventoriesconsist of product held at our manufacturing facility and warehouses, as wellas finished goods at customer sites for which the customer has takenpossession, but based on specific contractual terms, title has not yet passedto the customer. Finished goods at customer sites were approximately $140.6million and $138.0 million at September 30, 2009 and December 31,2008, respectively. Deferred costs consist of product shipped to the customerwhere the rights and obligations of ownership have passed to the customer, butrevenue has not yet been recognized.

 

Debt

 

Wehad no bank loans outstanding at September 30, 2009. During the third quarter of 2009, a$263.5 million of credit facility expired and was not renewed.  At September 30,2009, our only source of available credit was a credit facility in Chinaproviding $58.6 million in borrowing availability, of which $14.7 million wasavailable for working capital draws and $43.9 million was available fornon-working capital draws. At September 30,2009, there are no borrowings under this facility. This credit facility expiresin the fourth quarter of 2009.

 

***Liquidity***

 

We incurred net losses of $150.3 million, $195.6 million and $117.3million during the years ended December 31, 2008, 2007 and 2006,respectively. During the nine months ended September 30, 2009, we incurreda net loss of $186.3 million. We recorded operating losses in 18 of the 19 consecutivequarters in the period ended September 30, 2009. At September 30,2009 we had an accumulated deficit of $1,027.8 million. We incurred net cashoutflows from operations of $55.2 million and $225.1 million in 2008 and 2007respectively. Cash used in operations was $89.2 million during the nine monthsended September 30, 2009.  At September 30,2009, we had cash and cash equivalents of $237.1 million in the aggregate tomeet our liquidity requirements, of which $91.3 million was held by oursubsidiaries in China. China imposes currency exchange controls on certaintransfers of funds from/to China.  Weexpect to continue to incur losses and negative cash flows from operations overat least the remainder of 2009.

 

Our China subsidiariespaid an aggregate $150 million in dividends to our U.S. parent companyduring the year ended December 31, 2007 and another $100 million in February 2008.While these cash transfers are offset and eliminated in preparing ourconsolidated cash flow statements, they have been a principal source of fundingof our non-China operations during the periods in which they were made. In February 2009,our China subsidiaries paid an additional $50 million in dividends to our U.S.parent company, and additional cash dividends from our China based subsidiariesto the U.S. parent company may be necessary to fund our non-China cashrequirements in the remainder of 2009. However, going forward, the amount ofcash available for transfer from the China subsidiaries will be limited both bythe liquidity needs of the subsidiaries in China and the restrictionon currency exchange byChinese-government mandated requirements including currency exchange controlson certain transfers of funds outside of China.

 

Ouronly committed source for borrowings is a credit facility in China. Eachborrowing under this facility is subject to the bank’s then current favorableopinion of the credit worthiness of the Company’s China subsidiaries, the bankhaving funds available for lending, and other Chinese banking regulations andpractices. As a result, we cannot be certain that borrowings under thisfacility will be adequate, if available at all, to meet our liquidityrequirements. During the third quarter of 2009, a $263.5 million creditfacility expired and was not renewed. The remaining approximately $58.6 millioncredit facility expires in the fourth quarter of 2009. We are not certain thatnew credit facilities will be available on commercially reasonable terms or atall.  Accordingly, we can not be certainthat borrowings under our credit facility in China will be adequate to meet ourfinancing requirements.

 

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In2009 and 2008, we took a number of actions to improve our liquidity, includingdivesting our non-core businesses. In December 2008, management announcedfurther initiatives including efforts to eliminate functional duplications byconsolidation of a number of key functions into our China operations. In June 2009,management expanded the initiatives to include a worldwide reduction inworkforce, outsourcing of manufacturing operations and optimizing R&Dspending with a focus on selected products. As a result of these actions andother restructuring initiatives undertaken by the management, our year-to-yearquarterly selling, general and administrative and research and developmentoperating expenses decreased significantly in the first nine months of 2009compared with the comparable period of 2008 and management believes thecontinuing efforts to stream-line operations will enable our fixed cost base to be better alignedwith operations, market demand and projected sales levels. If projectedsales do not materialize, we will need to take further actions to reduce costsand expenses or explore other cost reduction options.

 

Management believes thatif we are able to achieve projected cash collections from customers and containexpenses and cash used in operations, both our China and non-China operationswill have sufficient liquidity to finance working capital and capitalexpenditure needs during the next 12 months. If we are not able to execute ourplan successfully, we may need to obtain funds from equity or debt financings.There can be no assurance that additional financing, if required, will beavailable on terms satisfactory to us or at all, and if funds are raised in thefuture through issuance of preferred stock or debt, these securities could haverights, privileges or preference senior to those of our common stock and newlyissued debt could contain debt covenants that impose restrictions on ouroperations. Further, any sale of newly issued debt or equity securities couldresult in additional dilution to our current shareholders.

 

Recently, globaleconomies have experienced a significant downturn driven by a financial andcredit crisis that will continue to challenge such economies for some period oftime. Under the current macroeconomic environment there are significant risksand uncertainties inherent in management’s ability to forecast future results.The operating environment confronting us, both internally and externally,raises significant uncertainties. While improvements in our operating results,cash flows and liquidity are anticipated as management’s initiatives to controland reduce costs while maintaining and growing our revenue base are fullyimplemented, our recurring losses and expected negative cash flows fromoperations raise substantial doubt about our ability to continue as a goingconcern. Our independent registered public accounting firm included anexplanatory paragraph highlighting this uncertainty in its “Report ofIndependent Registered Public Accounting Firm” dated March 2, 2009 includedin “Part II, Item 8-Financial Statements and Supplementary Data” in ourAnnual Report on Form 10-K for the year ended December 31, 2008. The consolidated financial statements donot include any adjustments relating to the recoverability and classificationof recorded assets or the amounts and classification of liabilities or anyother adjustments that may be necessary if the entity is unable tocontinue as a going concern.

 

***Income taxes***

 

TheChina Corporate Income Tax Law (“CIT Law”) became effective on January 1,2008.  Under the CIT Law, China’s dualtax system for domestic enterprises and foreign investment enterprises (“FIEs”)was effectively replaced by a unified system. The new law establishes a tax rate of 25% for most enterprises and areduced tax rate of 15% for certain qualified high technology enterprises.

 

Priorto this change in tax law, certain subsidiaries and joint ventures located inChina enjoyed tax benefits in China which were generally available toFIEs.   The tax holidays/incentives forFIEs were applicable or potentially applicable to UTStarcom ChongQing TelecomCo. Ltd. (“CUTS”), UTStarcom Telecom Co., Ltd. (“HUTS”) and UTStarcom ChinaCo., Ltd. (“UTSC”), our active subsidiaries in China, as those entities mayqualify as accredited technologically advanced enterprises.

 

The CIT Law targets certain industries for thereduced 15% tax rate for certain qualified high technology enterprises.    For FIEs established before thepromulgation of the new law who had previously enjoyed lower tax rates, anyincrease in their tax rates would be gradually phased in over five years.  During the fourth quarter of 2008, two of ourChina subsidiaries, HUTS and UTSC, were approved for the reduced 15% tax rate.The approval lasts for three years and is retroactive to January 1, 2008.

 

The Chinese central government may review and audittax benefits granted by local or provincial authorities and could determine todisallow such benefits. Certain of our subsidiaries and joint ventures locatedin China enjoy tax benefits in China that are generally available to foreigninvestment enterprises. If these tax benefits are reduced, disallowed orrepealed due to changes in tax laws or determination by the Chinese government,our business could suffer.

 

***Off-balance sheet arrangements***

 

At September 30,2009, we do not have any off-balance sheet arrangements.

 

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***Contractualobligations and other commitments***

 

The following tablesummarizes our significant contractual obligations at September 30, 2009:

 
| ** **           | ** ** | **Payments Due by Period** | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
| ** **           | ** ** | **(in thousands)**    | ** ** |
| Operating leases     |       | $                          | 14,418     |   | $ | 7,793 |   | $ | 5,728 |   | $ | 897 |   | $ | — |   |
| Letters of credit    |       | $                          | 32,862     |   | $ | 23,806 |   | $ | 9,056 |   | $ | — |   | $ | — |   |
| Purchase commitments |       | $                          | 61,227     |   | $ | 61,120 |   | $ | 107 |   | $ | — |   | $ | — |   |

 

*Operating leases*

 

We lease certainfacilities under non-cancelable operating leases that expire at various datesthrough 2013.

 

*Letters of credit*

 

We issue standby lettersof credit primarily to support international sales activities outside of Chinaand in support of purchase commitments. When we submit a bid for a sale, oftenthe potential customer will require that we issue a bid bond or a standbyletter of credit to demonstrate our commitment through the bid process. Inaddition, we may be required to issue standby letters of credit as guaranteesfor advance customer payments upon contract signing or performance guarantees.The standby letters of credit usually expire six to twelve months from date ofissuance without being drawn by the beneficiary thereof.

 

*Purchase commitments*

 

Weare obligated to purchase raw materials and work-in-process inventory undervarious orders from various suppliers, all of which should be fulfilled withoutadverse consequences material to our operations or financial condition.Purchase commitments in the table above include agreements that are cancelablewithout penalty.

 

*Intellectual property*

 

Certain sales contractsinclude provisions under which customers would be indemnified by us in theevent of, among other things, a third-party claim against the customer forintellectual property rights infringement related to our products. There are nolimitations on the maximum potential future payments under these guarantees. Wehave not accrued any amounts in relation to these provisions as no such claimshave been made and we believe we have valid enforceable rights to the intellectualproperty embedded in our products.

 

*Uncertain tax positions*

 

As of September 30,2009, we had $72.6 million of gross unrecognized tax benefits. Ifrecognized, the portion of gross unrecognized tax benefits that would decreasethe provision for income taxes and decrease our net loss is $14.2 million. The impact on net incomereflects the gross unrecognized tax benefits net of certain deferred tax assetsand the federal tax benefit of state income tax items totaling $58.4 million. We have not included theseamounts in the table of contractual obligations and commercial commitmentsbecause of the difficulty in making reasonably reliable estimates of the timingof cash settlements with the respective taxing authorities.

 

*Third Party Commissions*

 

We record accruals forcommissions payable to third parties in the normal course of business. Such commissions are recorded based on the terms of the contracts between usand the third parties and paid pursuant to such contracts.  Consistentwith our accounting policies, these commissions are recorded as operatingexpense in the period in which the liability is incurred.  As of September 30,2009, approximately $6.3 million of such accrued commissions had not beenclaimed by the third parties for more than three years.  Management hasperformed, and continues to perform, follow-up procedures with respect to theseaccrued commissions. Upon completion of such follow-up procedures, if theaccrued commissions have not been claimed and the statute of limitations, ifany, has expired or a reasonable period of time has elapsed, we will releasesuch accruals. Such reversals will be recorded in the Statementof Operations during the period management determines that such accrualsare no longer necessary. During the nine months ended September 30, 2009we released approximately $0.8 million of accruals related to third partycommissions and during the nine months ended September 30, 2008 wereleased $4.5 million of accruals related to third party commissions to cost ofnet sales.

 

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**OTHERINFORMATION**

 

In the secondquarter of 2009, PricewaterhouseCoopers Zhong Tian CPAs Limited Company, basedin the People’s Republic of China and a member of the PricewaterhouseCoopersInternational Network, assumed responsibility as the independent registeredpublic accounting firm of the Company. Previously, the Company’s certifyingaccountant was PricewaterhouseCoopers LLP in the United States, also a memberof the PricewaterhouseCoopers International Network.

 

**ITEM3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

 

We are exposed to theimpact of interest rate changes, changes in foreign currency exchange rates andchanges in the stock market.

 

***Interest RateRisk***

 

Our exposure to market risk for changes in interest rates relatesprimarily to our investment portfolio. The fair value of our investmentportfolio would not be significantly affected by either a 10% increase ordecrease in interest rates due mainly to the short term nature of most of ourinvestment portfolio. However, our interest income can be sensitive to changesin the general level of U.S and China interest rates since the majority of ourfunds are invested in instruments with maturities of less than one year. In adeclining interest rate environment, as short term investments mature,reinvestment occurs at less favorable market rates. Given the short term natureof certain investments, anticipated declining interest rates will negativelyimpact our investment income.

 

We maintain an investment portfolio of various holdings, types andmaturities. We do not use derivative financial instruments. We place our cashinvestments in instruments that meet high credit quality standards, asspecified in our investment policy guidelines. Our policy is to limit the riskof principal loss and to ensure the safety of invested funds by generallyattempting to limit market risk. Funds in excess of current operatingrequirements are mostly invested in money market funds which are rated AAA. Ourcash and cash equivalents are not subject to significant interest rate risk dueto the short maturities of these instruments. As of September 30, 2009 thecarrying value of our cash and cash equivalents approximated fair value.

 

The table belowrepresents carrying amounts and related weighted-average interest rates of ourinvestment portfolio at September 30, 2009:

 
| ** **                   | ** ** | **(in thousands, except** | ** ** |
|------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **interest rates)**            | ** ** |
| Cash and cash equivalents    |       | $                                   | 237,112    |   |
| Average interest rate        |       | 0.48                                | %          |
|                         |       |                                |       |
| Restricted cash - short-term |       | $                                   | 24,445     |   |
| Average interest rate        |       | 0.08                                | %          |
|                         |       |                                |       |
| Short-term investments       |       | $                                   | 4,544      |   |
| Average interest rate        |       | 0.73                                | %          |
|                         |       |                                |       |
| Restricted cash - long-term  |       | $                                   | 9,056      |   |
| Average interest rate        |       | 0.03                                | %          |
|                         |       |                                |       |
| Total investment securities  |       | $                                   | 275,157    |   |
| Average interest rate        |       | 0.43                                | %          |

 

***EquityInvestment Risk***

 

Our investment portfolioincludes an equity investment in a publicly traded company, the value of whichis subject to market price volatility. Economic events could adversely affect the public equities market andgeneral economic conditions may worsen. Should the fair value of our publicly traded equity investments declinebelow their cost basis in a manner deemed to be other-than-temporary, ourearnings may be adversely affected.  Wehave also invested in several privately held companies as well as investmentfunds which invest primarily in privately held companies, many of which canstill be considered in the start-up or development stages.  These investments are inherently risky, asthe market for the technologies or products they have under development aretypically in the early stages and may never materialize.

 

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***ForeignExchange Rate Risk***

 

As a multinationalcompany, we conduct our business in a wide variety of currencies and aretherefore subject to market risk for changes in foreign exchange rates.  We expect to continue to expand our businessglobally and, as such, expect that an increasing proportion of our business maybe denominated in currencies other than U.S. Dollars.  As a result, fluctuations in foreign currenciesmay have a material impact on our business, results of operations and financialcondition.

 

Historically,the majority of our foreign-currency denominated sales have been made in China,denominated in Renminbi. Additionally, during 2006, 2007, 2008 and through thesecond quarter of 2009, we made significant sales in Japanese Yen, Euros,Indian Rupees and Canadian Dollars. Due to China’s currency exchange controlregulations, we are limited in our ability to convert and repatriate Renminbi,as well as in our ability to engage in foreign currency hedging activities inChina. The balance ofour cash held in China was $91.3 million at September 30, 2009.  Since China un-pegged the Renminbi from theU.S. Dollar in July, 2005, through September 30, 2009, the Renminbi hasstrengthened by more than 15% versus the U.S. Dollar.  However, it is uncertain what furtheradjustments may be made in the future.

 

We may manage foreigncurrency exposures using forward and option contracts to hedge and thusminimize exposure to the risk of the eventual net cash inflows and outflowsresulting from foreign currency denominated transactions with customers,suppliers, and non-U.S. subsidiaries, however, we are not currently hedging anysuch transactions.  As our foreigncurrency balances are not currently hedged, any significant revaluation of ourforeign currency exposures may materially and adversely affect our business,results of operation and financial condition. We do not enter into foreign exchange forward or option contracts fortrading purposes.

 

Given our exposure tointernational markets, we regularly monitor all of our material foreigncurrency exposures.  We use sensitivityanalysis to measure our foreign currency risk by computing the potentialdecrease in cash flows that may result from adverse or beneficial changes inforeign exchange rates, relative to the functional currency with all othervariables held constant.  The analysiscovers all of our underlying exposures for foreign currency denominatedfinancial instruments.  The foreigncurrency exchange rates used were based on market rates in effect at September 30,2009.  The sensitivity analysis indicatedthat a hypothetical 10% adverse or beneficial movement in exchange rates wouldhave resulted in a loss or gain in the fair values of our foreign currencydenominated financial instruments of $17.9 million at September 30, 2009.

 

**ITEM4—CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

UTStarcom, Inc. (“UTStarcom”or the “Company”) maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the reports theCompany files or submits pursuant to the Securities Exchange Act of 1934, asamended (“Exchange Act”), is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s (“SEC”)rules and forms, and that such information is accumulated and communicatedto the Company’s management, including its chief executive officer (“CEO”) andchief financial officer (“CFO”), as appropriate, to allow timely decisionsregarding required financial disclosure.

 

In connection with thepreparation of this Quarterly Report on Form 10-Q (“Form 10-Q”), theCompany carried out an evaluation as of September 30, 2009 under thesupervision and with the participation of the Company’s management, includingthe CEO and CFO, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act. Based upon this evaluation, managementconcluded that as of September 30, 2009 the Company’s disclosure controlsand procedures were not effective because of the material weaknesses describedin “Management’s Annual Report on Internal Control over Financial Reporting,”included in “Part II, Item 9A - Controls and Procedures” (“Item 9A”) inthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31,2008 (the “2008 Annual Report”), as well as the material weakness related torevenue recognition described in the “Newly Identified Material Weakness inInternal Control over Financial Reporting” included in “Part I, Item 4 —Controls and Procedures” (“Item 4”) in the Company’s Quarterly Report on Form 10-Qfor the quarter ended March 31, 2009 (“March 31, 2009 10-Q”), whichhave not yet been remediated. Investors are directed to Item 9A in the 2008Annual Report and Item 4 in the March 31, 2009 10-Q for the description ofthese weaknesses.

 

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A “material weakness” isa deficiency, or a combination of deficiencies, in internal control overfinancial reporting, such that there is a reasonable possibility that amaterial misstatement of the Company’s annual or interim financial statementswill not be prevented or detected on a timely basis. To address the materialweaknesses in internal control over financial reporting noted above, theCompany performed additional analyses and other procedures (as furtherdescribed below under “Management’s Planned Remediation Initiatives and InterimMeasures”) to ensure that the Company’s consolidated financial statements wereprepared in accordance with generally accepted accounting principles in theUnited States (“GAAP”). Accordingly, the Company’s management believes that theconsolidated financial statements included in this Form 10-Q fairlypresent in all material respects the Company’s financial condition, results ofoperations and cash flows for the periods presented and that this Form 10-Qdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the periods covered by this report.

 

**Management’sPlanned Remediation Initiatives and Interim Measures**

 

The Company plans to makenecessary changes and improvements to the overall design of its controlenvironment to address the material weaknesses in internal control overfinancial reporting noted above. In particular, the Company implemented during2008 and the first, second and third quarters of 2009, and plans to continue toimplement during the remainder of 2009, the specific measures describedbelow.  In addition, in connection withthe September 30, 2009 quarter-end reporting process, the Company hasundertaken additional measures described under the subheading “Interim Measures”below to provide reasonable assurance regarding the reliability of financialreporting and the preparation of the Company’s consolidated financialstatements included in this Form 10-Q and to ensure that materialinformation relating to the Company and its consolidated subsidiaries was madeknown to management in connection with the preparation of this Form 10-Q.

 

***RemediationInitiatives***

 

1.               To remediate the materialweakness described in Item 9A in the 2008 Annual Report, in “*The Company did not maintain effective controls atits U.S. headquarters over the appropriate matching of costs of sales withrevenue and the recording of reserves for losses on customer contracts,*”the Company’s planned remediation measures are intended to address materialweaknesses that have the potential of misstating these balances in thefinancial statements in future financial periods. These measures includethe following:

 

i.                  During 2008, the Companyimplemented an upgrade to its enterprise resource planning (“ERP”) system,which provided enhanced automated features and controls around the matching ofcost of sales to revenue.

 

ii.               In the third and fourthquarters of 2008, the Company transitioned the responsibility for calculatingthe loss contract reserves to its local project office in India to facilitateenhanced coordination between the local business units, operations, sales andthe finance team. In the remainder of 2009, we will continue to enhance thetimeliness and quality of the information to enable a more effective review ofthe components of the loss reserve calculation by the business units,operations, sales and finance teams. In addition, corporate finance managementwill perform enhanced independent and timely reviews of the loss contract reservecalculation.

 

2.               To remediate the materialweakness described in Item 9A in the 2008 Annual Report, in “*The Company did not maintain effective controls at its US headquartersover the period-end financial reporting process*” the Company addedtechnical resources to the corporate finance team in the U.S. late in the thirdquarter of fiscal 2008. The Company increased in the first, second and thirdquarters of 2009, and in the remainder of 2009 is planning to increasetechnical resources in China and such additional technical resources willenable the Company to broaden the scope and quality of the independent reviewsof underlying information related to the Company’s period-end financialreporting process, to standardize the processes for such financial reviews andto ensure the reviewers analyze and monitor financial information in aconsistent and thorough manner.

 

3.               To remediate the newlyidentified material weakness described in the Item 4 of the March 31, 2009 10-Q in “*The Company identified a material weakness in its internal control overfinancial reporting related to revenue recognition,*” the Company isplanning in the remainder of 2009 to enhance its contracts review process inorder to ensure that appropriate members of management have reviewed andconfirmed critical information necessary to assess the proper revenuerecognition accounting.

 

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**Interim Measures**

 

Management has not yet implemented all of the measures described aboveunder the heading “*Remediation Initiatives*”and/or tested them. Nevertheless, management believes the measures identifiedabove to the extent they have been implemented, together with other measuresundertaken by the Company in connection with the preparation of the condensedconsolidated financial statements included in this Form 10-Q and describedbelow, address the material weaknesses in internal control over financialreporting described above. These other measures include the following:

 

1.               Analysis of the backlogreport and gross margin report, as well as extensive reviews of the reservesfor losses on customer contracts, in India, including reviews of the inventorycost against the current cost backlog report, and reconciliation between thelocal cost records to the cost records at the Company’s headquarters.

 

2.               A variety of manual reviewprocedures, such as an extensive review of journal entry postings into the ERPsystem, a thorough review of account reconciliations, including revenue anddeferred revenue accounts, and a detailed review of trial balances includingthose issued from decentralized locations, to ensure the completeness andaccuracy of the underlying financial information used to generate the financialstatements.

 

***Management’s Conclusion***

 

Management believes theremediation measures described under “Management’sPlanned Remediation Initiatives and Interim Measures” above willstrengthen the Company’s internal control over financial reporting andremediate the material weaknesses identified above. However, management has notyet implemented all of these measures and/or tested them.  Management believes that the interim measuresdescribed under “Management’s Planned Remediation Initiatives and InterimMeasures” above ensure the reliability of financial reporting and thepreparation of the Company’s financial statements included in this Form 10-Qand has discussed this with the Company’s Audit Committee.

 

The Company is committedto continuing to improve its internal control processes and will continue todiligently and vigorously review its disclosure controls and procedures and itsinternal control over financial reporting in order to ensure compliance withthe requirements of Section 404 of the Sarbanes-Oxley Act of 2002.However, any control system, regardless of how well designed, operated andevaluated, can provide only reasonable, not absolute, assurance that itsobjectives will be met. As management continues to evaluate and work to improvethe Company’s internal control over financial reporting, it may determine totake additional or alternate measures to address control deficiencies, and itmay determine not to complete certain of the measures described under “Management’s Planned Remediation Initiativesand Interim Measures” above.

 

**Changesin Internal Control over Financial Reporting**

 

During the third quarter of 2009, the Companyfinalized its assessment of additional implemented modules of its ERP system inthe operation in India. The Company will continue to enhance these additionalmodules in the remainder of 2009. The Company has modifiedand will continue modifying the design and documentation of internal controlsprocesses and procedures relating totheimplemented modules as appropriateand necessary to supplement and complement existing internal controls overfinancial reporting.

 

**PART II—OTHER INFORMATION**

 

**ITEM 1—LEGALPROCEEDINGS**

 

For a description oflitigation and governmental investigations, see Note 10 to our CondensedConsolidated Financial Statements included under Part 1, Item 1 of thisQuarterly Report on Form 10-Q.

 

**ITEM 1A—RISKFACTORS**

 

For a description of risk factors that couldmaterially affect our business, financial condition and future operatingresults, please consider the risk factors set forth in “Part I, Item 1A —Risk Factors” of our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008 andin “Part II, Item 1A-Risk Factors” of our Quarterly Report on Form 10-Qfor the fiscal quarter ended June 30, 2009.Additional risks and uncertainties not currently knownto us or that we currently deem to be immaterial also may materially andadversely affect our business, financial condition or future operating results.

 

**ITEM 2—UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None

 

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**ITEM 3—DEFAULTSUPON SENIOR SECURITIES**

 

None

 

**ITEM 4—SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None

 

**ITEM 5—OTHERINFORMATION**

 

None

 

**ITEM 6—EXHIBITS**

 
| **Exhibit  Number** | ** ** | **EXHIBIT DESCRIPTION**                                                                                                                                                                                                        |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Thirteenth Amended and  Restated Certificate of Incorporation of UTStarcom, Inc., as amended (incorporated  by reference to Exhibit 3.1 of Current Report on Form 8-K filed  with the SEC on December 12, 2003) |
| 3.2                 |       | Second Amended and  Restated Bylaws of UTStarcom, Inc., effective June 28, 2008  (incorporated by reference to Exhibit 3.1 of Current Report on  Form 8-K filed with the SEC on April 14, 2008)            |
| 4.1                 |       | See exhibits 3.1 and  3.2 for provisions of the Certificate of Incorporation and Bylaws defining  the rights of holders of Common Stock.                                                                                            |
| 4.2                 |       | Specimen Common Stock  Certificate (incorporated by reference to Exhibit 4.1 of Form S-1/A  filed with the SEC on February 7, 2000)                                                                                  |
| 4.3                 |       | Third Amended and  Restated Registration Rights Agreement dated December 14, 1999  (incorporated by reference to Exhibit 4.2 of Form S-1 filed with  the SEC on December 20, 1999)                              |
| 31.1                |       | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of  1934, as amended                                                  |
| 31.2                |       | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of  1934, as amended                                                  |
| 32.1                |       | Certifications of the  Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                          |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                         | UTSTARCOM, INC. |
|------------------------------|----------------------|
|                         |                 |
| Date:  November 9, 2009 | By:                  | /s/  VIRAJ J. PATEL |
|                         |                 | Viraj  J. Patel |
| * *                     | * *             | *Interim Chief Financial Officer* |
| * *                     | * *             | *(Principal  Financial Officer)* |

 

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